In order to achieve a successful, and profitableexit, timing is one of the most critical decisions to the overall exit strategy. Many business owners inherently know when it is time to exit but there are also a number of factors they need to ensure they achieve the best outcome possible. After all, it wouldseem foolish deciding to sell a business without properly assessing the market performance and looking at the company itself with an objective eye.
So how can business owners ensure it is theright time to make an exit
Choosing to sell a business at a time whenyour sector is performing well will undoubtedly make your business more desirable to potential buyers. It will also allow them to see the growth potential of the business should they choose to continue running the company as it is.
To maximise on the sector performance, youshould consider selling before it has reached its peak. This will allow you to demonstrate the businesses potential and if you are able to examine where the sector will be heading, this will give you a stronger position when negotiating with a buyer.
Of course there are a number of sectors thatmaintain a strong performance throughout so this should be taken into account when considering an exit.
Read more business exit related articles:
- If an entrepreneur fails to plan an exit, do they plan to fail
- Thinking of selling Here’s how to make a grand exit
- Lara Morgan: What I learnt from screwing up my first business exit
Once youve assessed the sector, you need totake a look at where your business lies within it. Many business owners fail to look at their company objectively. However, taking a step back to analyse the performance will enable you to negotiate openly and honestly with a buyer. Businesses typically haveA lifecycle made of four stages (inception, growth, maturity and decline) and you need to understand where your business is in this cycle.
It is also important to analyse your businesscompared to the industry standard in terms of its operational and financial metrics. Is the amount of work being put into the business paying off financially A crucial step in timing a sale is to prove the ROI that a buyer will obtain from purchasing yourcompany. If your operational efficiency is lower than average then a potential buyer might see your business as a possible risk. Whereas if you’re on par or outperforming, youll seem a much stronger prospect.
Similarly, to sector performance, the besttime to consider a sale is when the business is performing well but before it has hit its peak. In order to achieve maximum value, you need to be able to demonstrate the future growth and potential to a buyer rather than focusing on previous achievements,no matter how significant they were.
It also important to take into account howlong it can take to sell a business and if your business will hit its peak within this timeframe. A general rule is that it can take anywhere between 6-18 months to complete a sale so youll need to take this into account when choosing a time to sell. If youdecide too soon or too late this could have an adverse impact on the final sale price.
Reasons for selling the business
In order to utilise the business and sectorsperformance to generate the best profit, you should think about why you might look to exit your business to begin with. If it is a simple case of it being the next stage of your strategy and the best thing for the business, youll be able to time your exitmore thoughtfully and maximise on both the sector and business performance.
However, some business owners choose to exitdue to losing interest in the company and want to hand it over. This can be detrimental to the sale as it can lead to decisions being made hastily. Selling the company under these circumstances will almost always lead to a lower final sale price. This is whybeing able to look at the business from an objective standpoint is key to timing a sale.
Whilst there is seldom a perfect time tosell a business, taking into account your companys performance, industry trends and future growth potential are the first steps to deciding when is right for you. Once you have decided this, youll next have to navigate the labyrinth of exit strategies availableto you.
Jay Dias is founder and MD of Leela Capital.
We also took a look at how one of the key responsibilities of being a CFO of a private-equity backed company is to guide and lead the business through an exit process to crystallise the value that has been created for the shareholders.