As the in-house AVA and leader of the Central Florida Office for Bankers Advocate, business owners often ask me how to predict the right time to sell. I know from recent conversations, that many owners feel they missed their chance to exit a few years ago when the market was ripe for transactions. Now the question revolves around when the market will return.
Let me suggest that, as an entrepreneur, you have the opportunity to develop a more reliable approach to timing your exit, then attempting to predict the cyclical nature of the mergers and acquisitions market. There are simple steps you can take to gain control of your own timing, whenever that may be. These steps require a focus on what you, and only you, can control.
The first step is to know what your exit will look like when you arrive, regardless of when that might be. For instance, you should know at any given moment how much after tax “cash” you will need from the sale of your business to meet your goals. Do not just pick an arbitrary number out of a hat because it sounds good. Get specific and know why you have that number as your target.
This step is relatively simple if you hire a certified financial planner to help you update or create your personal financial plan (you can contact us for a referral to a trusted advisor in this area if you do not already have one). Be sure that your plan takes into account the lifestyle needs you are seeking, a reasonable rate of return you can expect from the investment of your after tax proceeds, and any required adjustments for taxes and inflation.
Now that you know your target amount of cash, you need to know your current business value. This is definitely a situation where you get what you pay for. While you could arrive at an estimate at no charge by contacting a business broker, or using an industry multiple for your own calculation, you will actually be doing yourself a disservice. More then knowing the value your business could fetch currently, you want to know why your business holds its current value, and the areas you need to improve to increase that value.
A third party valuation is certainly a worthwhile investment at this time. Think of your valuation, not simply as a number, but more importantly, as an analysis of your Strengths, Weaknesses, Opportunities, and Threats (SWOT Analysis). If you invest in a certified appraisal, you will gain the business intelligence you need to close the gap between your current value and target value.
Share your valuation with your trusted advisors including your financial advisor, CPA, attorney, and chosen transaction advisor. Enlist their help to interpret, identify, prioritize, and make a recommended task list that can help you build value and overcome weaknesses as efficiently as possible. It should be clear to these advisors from your financial plan and complete valuation report, what your objectives are, and the areas you need to address. Having this information available before you meet with your advisors keeps you in control and will save you a considerable amount of time and expense getting their help.
Finally, implement your task list. Be honest about what you can do for yourself while maintaining your business operations, and what you may need to hire out. If you schedule your tasks in a manageable way, hold your advisors accountable, and ask them to do the same for you, you will be well on your way to achieving your objective – timing your business exit on your terms.
At the completion of each tax year, have your valuation updated, which should only require a minimal investment. When you cross your threshold value you identified in step one, the timing is right for you. However, do not be surprised if you are still not ready to exit. The improvements you make that build value in the eyes of your future acquirer; fulfill the same needs you have to be a satisfied owner of your business as well.