Choosing the right time to sell a business
What you need to know
Start thinking about a sale up to 18 months in advance, so you can choose the most attractive time to sell
Consider the various sales options, taking into account whether you wish to retain a stake in the business
Be realistic with your forecasts to ensure buyers have a true view of the company’s finances
Owners should consult a tax adviser and discuss with a wealth manager how they plan to generate an income after the sale
The sale of a business is a momentous occasion for any entrepreneur and can mark the start of an exciting new phase of your life. This could allow you to pursue new ventures or finally enjoy a hard-earned retirement.
Or perhaps outside investment is essential to achieving your vision for the business's future – a future you may want to remain actively involved in.
So how should you approach an exit strategy in a way that leads to the best outcomes for you and your business? In this article we examine how to sell a business and some of the pitfalls to avoid.
The factors behind a sale
There are typically three drivers behind a decision to sell.
The first is your view of business itself. Is it currently fit for purpose, and what are its future needs? The remaining two are external drivers – buyer appetite and market conditions.
Let's start with the business. A sale is often pursued when the current owner wishes to move on, or feels they have taken the company as far as they can.
Establishing the relationship you wish to have with the company in the future can be the starting point for the type of sale you pursue.
If you’re looking to make a clean break, then a sale to private equity or a strategic buyer may be suitable. If you wish to de-risk and extract value from the business, while still retaining a stake, private equity can again be a good fit.
You may also consider an initial public offering (IPO). Owners typically pursue an IPO when a business has reached a key point of transition, or a significant capital injection is needed in the business. We’ll explain more about these sale options in a moment.
Buyer appetite and market conditions can also be a major influence on choosing to sell. Many clients receive an unsolicited approach from somebody who has wowed them with a big offer or a compelling story about the future of the business. This can be highly tempting, even if the offer is unexpected.
On other occasions activity in the markets – particularly the IPO market – also often fuels interest from private owners to sell a business. But while comparing your situation to someone else's can be a strong motivator, every business is unique, and you can't simply apply one valuation to another company.
A sale is often pursued when the current owner wishes to move on, or feels they have taken the company as far as they can."
Preparing your business
The financial performance of the business is crucial to both the success of an exit and the value achieved. It's important to time the exit to coincide with a moment of great momentum in profitability and overall performance.
The immediate and medium-term future of the business is what acquirers, investors and the market at large are most preoccupied with. So being able to demonstrate year-on-year increases in revenues and profitability – and showing that it is sustainable – sits at the heart of a successful transaction.
Stakeholder alignment is also critical. It's important to ensure existing owners are at one in terms of the goals to be achieved, and the means of getting there.
Owners should also start tax planning early, making sure that it's robust and to avoid any nasty last-minute surprises. Rothschild & Co works with a trusted network of experts who can help you prepare before a sale takes place. You should also discuss with a wealth manager how you expect to generate a post-sale income.
Choosing the best way to sell
Trade sales, private equity sales and IPOs are the three common ways to sell a business.
A trade sale is when the business is purchased by a corporate acquirer. Generally, 100% of the company is sold. Buyers are looking to fulfil a purpose, such as entering a new marketplace or accessing new technologies or products.
In the past, private equity sales would also usually result in a 100% transfer of ownership. Today, the world of private equity is far more complex but can be adapted to your needs. There are minority buyouts, majority buyouts, hybrid deals, debt-funded deals, sponsor-less deals and more.
Some owners are happy to give up total control if the money is right. Others may be less willing to give an investor the power to change the company, particularly if you still have a significant amount of your own wealth tied up in it.
Finally, IPOs are another potential route for selling a business and they typically involve only a partial sale. IPOs also provide opportunities for a greater proportion of shares to be sold over time, which is rare in private equity deals.
IPOs are often used by families for succession planning, and they’re a good way of professionalising the business so it can progress to a new stage of development.
The timeline of any sale is highly dependent on your objectives as owner, and the type of sale that’s being pursued."
Timeline of a sale
The timeline of any sale is highly dependent on your objectives as owner, and the type of sale that’s being pursued.
Generally, you should give yourself between six and nine months to prepare for a sale once an adviser is appointed and the process is underway. This timeframe enables the advisers to do the necessary housekeeping in advance. But remember it may take two to three months to find an adviser you’re comfortable with.
In terms of timing the sale itself, if you have a business that you expect to show good performance over the next six to 18 months, that’s often the optimal time in which to start planning a transaction.
In the context of an IPO, it takes at least six to nine months – but more typically 12 to 18 months – for private companies to get to a stage where they can be floated.
Avoiding common mistakes
Business underperformance is the most consistent reason a sale fails. This is why owners must be realistic with advisers about forecasting the company's financial performance from the outset.
Giving an overly-optimistic view of the future performance will likely lead to a difficult negotiation on pricing. Owners should therefore be ambitious but conservative when setting financial forecasts.
If momentum starts flagging during due diligence, then the buyer could step away from the deal, or want to revisit terms. Performance, performance, performance is what needs to be delivered during the process.
Past performance is not a guide to future performance and nothing in this article constitutes advice. Although the information and data herein are obtained from sources believed to be reliable, no representation or warranty, expressed or implied, is or will be made and, save in the case of fraud, no responsibility or liability is or will be accepted by Rothschild & Co Wealth Management UK Limited as to or in relation to the fairness, accuracy or completeness of this document or the information forming the basis of this document or for any reliance placed on this document by any person whatsoever. In particular, no representation or warranty is given as to the achievement or reasonableness of any future projections, targets, estimates or forecasts contained in this document. Furthermore, all opinions and data used in this document are subject to change without prior notice.