The topics of Timing and Preparing to Sell a Business have come up in recent conversations. Below is an actual email I sent to a business owner that might be helpful as you communicate with prospective clients. This was sent as a follow-up to our meeting (identifying info removed).
“One additional thought to consider as you contemplate your timeframe. Please keep in mind I do this for a living. In no way am I steering you in any direction – just trying to be helpful and candid given my experience working with owners. Ultimately, you and your partner will decide when you are ready.
Let’s say you would like to be completely out of the business in 5 years max. Once a deal closes, it’s highly likely that the buyer will want you to remain involved (and incentivize you) for some period of time, possibly 2-3 years. An openness to this period of transition will produce more options for you in the form of more interested buyers. It will also help preserve the culture you and your team have built. Accounting for that transition period (and sticking with the same 5-year timeframe to be completely out) suggests closing a transaction in the next 2-3 years. Typically, a sale process will take 6-9 months from initial conversations with buyers to completing due diligence and closing the deal. That would suggest initiating the process within the next 1.5 – 2.5 years.
The best time to sell a company is when you are growing at a nice clip, your industry is of interest, and the current valuation multiples in your industry are healthy. We can currently check all three boxes.
Let’s say the company will do $___ EBITDA this year and a ___ multiple is reasonable, so a current valuation of approximately $___ or more (which has been confirmed based on my initial conversations with potential buyers). But, you have reservations because you think you could get to $___ EBITDA in 2-3 years and then sell for $___. Industry multiples ebb and flow, and this current run will eventually cool down. 2-3 years from now, the acquisition appetite for _____________ may not be as strong and multiples for ___________ could be closer to ________. So even if you were able to grow to $_____ EBITDA, your total valuation would effectively be about what it is today. Geopolitical uncertainty is also a major factor and the unknown of what things will look like in 2-3 years is something that needs to be considered.
I’ve met with numerous owners who said, “I wish I had sold when…”, and because I know an exit is part of your plan I thought this additional feedback was worth sharing.”
Please connect with me if you feel I can be helpful. A.J. Krause