Business owners come to me to sell their businesses. I’m a VR Business Broker serving the North Carolina Triangle Market so owners observe the exits I help other owners achieve and ask me about how to achieve their own.
Some of these owners I can help; they have a transferable business producing significant cash flow. Others I can’t. They may have had a great business, but now they are trending downwards. Unfortunately for many of these owners, they may have more of a problem than an opportunity.
In this post I will discuss what many business owners may never think of: selling a business after the best year ever.
But first a quick story.
A friend of mine sold her limousine service business. She started from humble beginnings but quickly scaled it to become one of the largest women owned businesses in the country. The year she sold it, she executed an extremely lucrative contract to transport athletes and celebrities for the US Open. At the same time, she was positioning for her exit. She knew that her acquirers would judge her firm with a weight towards her most recent year, and she knew that the US Open deal would put her firm in a tier that would command a much higher multiple of earnings. Quietly, after the event was over, she negotiated a deal that would later be covered in the media due to the size and significance of the transfer. The US Open deal was a gambit in a larger deal that she had been planning.
But this story is the opposite of many owner’s stories. Too often I hear about “the good old days” when “we did millions” and “we made more money than we know what to do with…” But the times changed, the owner aged, and the competition got more nimble. Too often I speak with owners whose options for exit have been reduced because they just ran out of time and energy to make a long term play that could bring them to that next level that my friend was able to get to when she sold her limousine business.
When considering when to sell a privately held small business, consider the following:
It Takes A Long Time To Recover From A Bad Year
Following a best year ever means the stakes are high to raise the bar for next year… Following your best year ever with even a “normal” year is a downward trend. A common “look back” period is three years. And in our recasting exercises with owners we put 60-70% of the weight on the cash flow of the most recent year. Buyers are extremely suspect of firms that are trending downwards; it’s considered risk and risk is always expressed in a lower multiple of earnings/revenue or less favorable terms such as an earn out or seller financing. Furthermore, banks are very conservative and have similar concerns about down years. Limited financing options sends a signal that a business isn’t “worth it” and further weakens the owners position for getting an aggressive purchase price.
Last Year Could Have Been Your Best Year Ever Due To Factors You Can’t Control
Even if you just had your best year ever, and you’ve executing a long term strategy to take your business to the next level in the next years to come, you can’t control all factors such as changes in technology (seen any movie rental stores lately?), or macro-economic factors. You could have your margins eroded by tarifs if you’re relying on overseas product due to a political fight in the white house… Business ownership is all about predicting and protecting, but some threats are unavoidable and unforeseeable.
Motivating Factors Tend To Get Stronger
When an owner comes to my office there is a mitigating factor which drove them to book an appointment, and carve out the time to learn what their options are. The ones with the most options start early, and the ones with the super motivating reasons for sale may not have planned ahead far enough. But for the vast majority of those with a need to sell, that reason doesn’t go away.
Whether it’s family pressure, illness, burnout, or the death of a critical business owner, those reasons for sale tend to get worse, not better. Sooner or later, the “pain” that drives them to consider selling the business outweighs the desire to get more money for the business. Imagining that business will keep getting better as life’s demands also get more distracting is an illogical frame of mind.
It Might Be Time To Play With The House’s Money
Some owners come to me in a great position; they just had their best year ever, but they are also aware that to bring on more people, to take on more products and services, to take the business to the next level… is more than they are capable of or willing to do. This self awareness is a valuable asset, because taking some money off the table when an owner has taken the business to the peak of their personal capacity, and handing the reins over to another with a different set of skills and resources may just be the best option. Starting something new with lessons learned, an open calendar, and a pocket full of cash is a great position to be in.
After Your Best Year Ever
There’s nothing wrong with getting out while the getting is good. And there is no guarantee that the good times will last. A unique skill set is recognizing where you are in the journey. And if you feel like you may be at the apex of your business, now might be the best time to sell. It never hurts to find out what it’s worth…
About The Author
If you are considering the sale of your Triangle business, message me, Neal Isaacs at Neal@VRbizTriangle.com for a confidential conversation to find out what it’s worth. Together we can explore your options for exit.