How To Know When To Cash Out

Every business will change ownership someday.  Some will have internal family succession plans while others will just decide one day to place the business up for sale.

But when is the best time to sell a business?

If you follow some of the investment bankers and business brokerage firms, they will speak to the M&A cycle, and where its at, at any point in time.

The basis of the M&A cycle is that over a period of time, buyers are more actively interested in acquiring businesses and business assets than at other times.  Factors that feed into the formation of an actual cycle are available capital, the economic landscape, market potential in different industries and so on.

While there is definitely a pattern to overall M&A activity, it also becomes a selling tool for M&A firms, brokers, and consultants, all  in the business of making money from buy/sell transactions.

The is also the more traditional approach to simply building your business year over year until you reach retirement age and then, at that point, if there is no internal or family succession, then sell your business interest in the open market.

Personally, I subscribe to a third approach…

Sell your business when someone wants to buy it for a fair or inflated price.

Under this approach, your business is always for sale whether you’ve been operating for 20 months or 20 years. By being open to this possibility, there may be more opportunities to consider over time than you may have thought possible.

The rationale for always being ready to sell is quite simple.  It takes a buyer with access to capital to complete a sale and without buyers that have the desire and means to take action, there is no market.

And you never know when you have created something of value for someone else.  Take a look at websites like YouTube.com and more recently Mint.com where young entrepreneurs were offered small fortunes to acquire their business models, only a few years after start up.  Perhaps you would view these as extreme cases, but the point here is when opportunity comes knocking, what will you do?

When a motivated buyer is interested in what you have it typically doesn’t hurt to at least listen.  And the motivation for buying could be all over the map… You own a property with a location of interest, you’ve developed a new technology or have a strong product brand, and so on.

The other side to this coin is what happens if you don’t take advantage of a great offer from an impatient buyer?  You could end up better off over time, but that most certainly is not guaranteed … a bird in the hand …

If the buyer is a competitor with money, then the competitor will likely take another approach to gain market share and end up becoming a stronger competitor in the future.

Another scenario to consider is when a small company hits the market right and starts growing like crazy, attracting buyer interest in the process.  If a larger company steps forward to buy you out because they have the infrastructure and resources to take advantage of your business offering, will you be able to scale the business yourself if you turn them down?

People can look back in the rear view mirror and say so and so business was foolish to sell out to XYZ company because of the profits generated from XYZ over time.  But there is absolutely no guarantee that the buyer would have been able to achieve the same level of success and in fact could have ended up failing badly and cashed out for nothing.

Too often, sellers establish their own time line for exit with the hope that there will be a fair market when the time comes to put the business up for sale.  And when you view your exit strategy decades into the future, this becomes a form of long term horizon gambling.

I’m not saying you should sell anytime someone shows an interest in a business you own, I’m merely saying you should consider it.

The best time to sell may be sooner than you think.