In order to achieve a successful, and profitable exit, 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 would seem 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 the right time to make an exit?
Choosing to sell a business at a time when your 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, you should 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 that maintain a strong performance throughout so this should be taken into account when considering an exit.
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Once you’ve assessed the sector, you need to take 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 have a 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 business compared 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 your company. 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, you’ll seem a much stronger prospect.
Similarly, to sector performance, the best time 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 how long 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 you’ll need to take this into account when choosing a time to sell. If you decide 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 sector’s performance 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, you’ll be able to time your exit more thoughtfully and maximise on both the sector and business performance.
However, some business owners choose to exit due 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 why being able to look at the business from an objective standpoint is key to timing a sale.
Whilst there is seldom a “perfect time” to sell a business, taking into account your company’s performance, industry trends and future growth potential are the first steps to deciding when is right for you. Once you have decided this, you’ll next have to navigate the labyrinth of exit strategies available to 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.
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