- Overall Trends
- Regardless of Timing, You’re in Control
- “When should I buy? When should I sell?”
- Business Owner’s Excitement
- Financial Performance
- M&A Industry
“When should I buy? When should I sell?”
These are some of the most common questions I get from buyers and sellers alike. They’re up there with: how can I finance a business acquisition, what about the interest rates, is it a fair price, and more.
Everyone wants to make sure that they get the most return from their investment, and that applies to both buyers and sellers.
The majority of off-market deals fall through because of the seller, so it’s always been important to me, as a broker, to fully understand sellers. Today I’m going to share with you when the right time to buy and sell a business is, based on three factors.
Let’s dive in.
Overall Trends
There are three factors to consider when we talk about timing a private market transaction:
- Business owner’s excitement
- Financial performance
- Mergers and acquisitions (M&A) industry
The first deals with the ebbs and flows of a business owner’s interest, excitement, and involvement regarding his or her business.
The second tends to be correlated with the first – the more growth a business owner sees in his or her business, the more excited she or he is about where the business is going.
The overall M&A market ebbs and flows based on what’s happening in the economy. Anytime there’s a sense of uncertainty in the economy, it tends to make investors more reluctant to part with their money.
When it comes to these three factors, timing is truly everything.
So when is the “best” time to buy or sell a business?
Business Owner’s Excitement
When it comes to the typical progression of a seller’s excitement running his or her business, initially, the excitement steadily increases as she or he starts to build this business and particularly when she or he starts to generate revenue.
Eventually, this level of interest and excitement fades – it’s just a question of when.
Sometimes it’s around 65 years old, when a seller is looking at more traditional retirement plans. Othertimes, it may simply be a change in professional interests or a sense of boredom that starts to account for the dip in excitement.
When should a seller sell?
As a seller, you should consider selling when you’re still excited, still making money, but you can foresee in the future that you’ll eventually tire of what you’re doing now.
When should a buyer buy?
As a buyer, you should look to buy a business that’s growing and profitable, but if you can help it, not at the peak of its growth rate. Multiples for higher growth companies tend to be significantly higher, so you’ll want to find a medium between a successful business and a business at its peak.
Financial Performance
Every business goes through four phases of a life cycle: startup, growth, maturity, then rebirth or decline.
When should a seller sell?
The number one mistake sellers make is that they wait until growth levels off before they decide to sell.
What they want to do instead is sell it during the growth curve. Why? Because growth and earnings are the fundamental drivers of value. So if you have a big tailwind on your company, you’re in a really prime position to sell.
If you want to time it out perfectly, aim to sell your business toward the tail end of this growth curve, leaving some future earnings for the buyer to realize.
When should a buyer buy?
A lot of buyers make the mistake of looking at the business as an entity outside of them.
The truth is, as the buyer and future CEO, you’re the one who’s going to be in control of your business’s growth. Theoretically, we would say it would be ideal to buy at the start of the growth phase, where there are not enough historical earnings, but you can see that the business is about to enter its adolescent growth curve.
You’ll be set as the buyer if you purchase a business while it’s on its growth curve. However, at the top of the curve, more cash will be required as the business will have a higher valuation. This is where institutional capital lives and where private equity groups tend to purchase.
M&A Industry
Unlike a seller’s interest level and the financial performance of the business, the M&A industry cycles up and down, like a boom and bust cycle or a sine wave.
Back around 2018 to 2019 timeframe, this was the start of the first M&A upcycle where online businesses have been mature enough to participate. Now in 2022, we’re on a downward trajectory.
That being said, you would think with increased inflation and interest rates, the M&A market is taking a beating, but that’s not entirely true. Even though we see “geopolitical instability, spiking inflation, supply chain issues, skittish capital markets, regulatory changes” fuel uncertainty in the current economic environment, current numbers are in line with pre-pandemic levels.
When should a seller sell?
The best time for a seller to sell is when the curve is at its peak. This is when M&A is popular, it’s a sellers’ market, and valuations are up.
“[C]hoosing when to sell must be a strategic decision that considers current business trends that impact the mergers and acquisitions market.
When the M&A market is hot, that’s when the deal will close more easily and likely for a much higher value. When the M&A market is not favorable, it is very tough to close deals, even at a significant discount.”
Selling a business is best done during periods of economic expansion.”
When should a buyer buy?
When is the best time for a buyer to buy a business in the M&A cycle? You would think that it’s at the very bottom of the dip, but that’s not always true. When the M&A market is at a low, banks dry up and financing becomes difficult to come by.
However, if you’re a cash buyer, this is absolutely the best time to come in and buy companies inexpensively.
Regardless of Timing, You’re in Control
Remember, as a buyer, it’s not the seller’s history or the current M&A market that dictate if your business grows – YOU do.
In the very common case of SBA financing where you can leverage just 10% down, in the long run you can sell that business for much more than 100% of the business (the enterprise value in whic you purchased the business) because you grow the overall value of the business during the time you’re the CEO.
It doesn’t matter when the “right” time is for a buyer, because you can, through your skills and willingness to show up and work, be a successful buyer and business owner.
Just remember, once your excitement as the new CEO starts to wane but you still have gas in the tank, it’s time to start thinking about your exit. I’ll be having this same conversation with you on the other side.
