There is a great deal of emotion that goes into selling a business. In terms of stress, it can be right up there with divorce and the death of a loved one. Though there are numerous logical reasons to sell or not sell a business, at the end of the day all decisions about making an exit are most heavily influenced by the emotions of the owners.
Logically, the right time to sell most businesses is when multiple buyers are interested and the highest price can be commanded. This perfect storm occurs when the following elements are in place: 1) there is a history of financial improvement in the business over the last few years, both in revenues and earnings. 2) There is strong evidence that revenues and earnings will continue to increase in future years. 3) Market conditions are such that the investment community believes there is good upside ahead for the industry segment your company serves.
When these conditions are met, the owners of the business are in the envious position of being able to find many interested buyers and command a premium price for their company. So, why would a potential seller disregard this logic?
The usual answer is that they want the upside for themselves. They see their business as growing and assume it will continue to do so, resulting in increasing value. This may be true, but there is also always the risk that the favorable conditions of today will not exist tomorrow. The wise investor knows that markets and businesses often turn on events that are not directly in anyone’s control.
I have dozens of stories about owners who held on too long. Owners who left millions on the table because the blinders they wore made them think the good times would never end. Think the Internet bust in 2000. Or the bumper stickers in Texas in the 80s that said “Please God, let there be just one more oil boom.” Or just an old-fashioned recession like the one that began at the end of 2008 when customers simply stopped buying.
So, how does a rational owner decide whether to sell now or hang on for a later, possibly more lucrative payday? Aside from the obvious decision about the money to be made, I find that asking a simple question can be very telling. “Are you, your family, and your investors emotionally prepared to wait another 5-10 years for the right time to sell?” This question forces the owner to take a hard look at what would happen if a downturn occurred in their business, requiring years to set things right and recoup value lost.
Oftentimes the owner has retirement plans, wants to spend more time with family, desires a change in lifestyle, has a yearning to pursue other interests, or is just plain tired and ready for a change. How do these goals compare with the very real possibility of needing to stick with the business for another decade or take a lesser price later? A smart investor knows no winning streak goes on forever. Is the owner in it for the love of the game, win or lose, for the next ten years? If so, perhaps it makes sense to stay at the table. If not, it’s probably time to cash out.