It's fun to own a business when times are good. You're selling in-demand products and services, gaining appreciative clients, creating new jobs, growing revenue, the bank is patting you on the back, you're receiving awards and accolades, the economy is growing, and you are making more money than you ever dreamed possible. That makes it a perfect time to sell!
Many business owners make the mistake of putting off selling for a few more years. Perhaps you know you want to exit within about five years but think "with things going so well, I'll wait a little longer before attempting to sell." But what if something unexpected happens? What if you lose two of your key clients? You lose a key staff member? A group of former disgruntled employees sues the company? A key supplier dramatically increases prices? The economy goes into recession? New regulations are imposed that are incompatible with your business model? Such changes could make your business entirely unmarketable in the short-term, negatively impact value, and may require waiting far longer to sell in order to correct the problems and develop enough of a track record afterwards that it won't have a significant impact on business value and marketability. Your plan of selling within 5 years? That may now be 10 years.
However, there's another reason that waiting to sell may not be such a good idea: we're in a seller's market, but it's not likely going to last. There are estimates of $1-2 Trillion of investment capital (between private equity groups and corporations) currently sitting on the sidelines looking to be placed in acquisitions. Given the low yield on US Treasuries (which set the minimum benchmark return as a very safe investment) the correlated return expected on equity investments is also low, and the cost of acquisition debt capital is low. The result of the massive amounts of investment capital and low interest rate environment has been higher prices being paid to sellers of successful businesses. Who knows how long it will be before interest rates start increasing, but there's certainly not much room for them to go any lower.
Right now the US Census Bureau indicates that over 70% of businesses that employ at least one person are owned by people over 53 years of age. Do you think some of those baby boomers are going to want to retire in the not too distant future? What's going to happen if you wait to sell when the bulk of other small and medium size business owners also decide to sell? I think you know where I'm going with this: it is likely that within a few short year the "seller's market" is going to become a "buyer's market", which will likely result in lower valuations and may even render some businesses unmarketable. Perhaps a business owner who today could sell for 7x earnings will only be able to achieve a price of 4-5x earnings in the buyer's market.
Following is a link to an article that describes the upcoming demographic shift in the business sale market: There's a Perfect Storm Approaching for Exiting Business Owners
Many business owners make the mistake of putting off selling for a few more years. Perhaps you know you want to exit within about five years but think "with things going so well, I'll wait a little longer before attempting to sell." But what if something unexpected happens? What if you lose two of your key clients? You lose a key staff member? A group of former disgruntled employees sues the company? A key supplier dramatically increases prices? The economy goes into recession? New regulations are imposed that are incompatible with your business model? Such changes could make your business entirely unmarketable in the short-term, negatively impact value, and may require waiting far longer to sell in order to correct the problems and develop enough of a track record afterwards that it won't have a significant impact on business value and marketability. Your plan of selling within 5 years? That may now be 10 years.
However, there's another reason that waiting to sell may not be such a good idea: we're in a seller's market, but it's not likely going to last. There are estimates of $1-2 Trillion of investment capital (between private equity groups and corporations) currently sitting on the sidelines looking to be placed in acquisitions. Given the low yield on US Treasuries (which set the minimum benchmark return as a very safe investment) the correlated return expected on equity investments is also low, and the cost of acquisition debt capital is low. The result of the massive amounts of investment capital and low interest rate environment has been higher prices being paid to sellers of successful businesses. Who knows how long it will be before interest rates start increasing, but there's certainly not much room for them to go any lower.
Right now the US Census Bureau indicates that over 70% of businesses that employ at least one person are owned by people over 53 years of age. Do you think some of those baby boomers are going to want to retire in the not too distant future? What's going to happen if you wait to sell when the bulk of other small and medium size business owners also decide to sell? I think you know where I'm going with this: it is likely that within a few short year the "seller's market" is going to become a "buyer's market", which will likely result in lower valuations and may even render some businesses unmarketable. Perhaps a business owner who today could sell for 7x earnings will only be able to achieve a price of 4-5x earnings in the buyer's market.
Following is a link to an article that describes the upcoming demographic shift in the business sale market: There's a Perfect Storm Approaching for Exiting Business Owners
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