Is Now a Good Time to Sell My Business?

By Emery Ellinger

So you have a profitable business despite the economic downturn. That’s great! However, you may want to sell your business within the next five years.

The question you may be asking is, “Do I sell now or wait for the economy to recover first?”

Common sense would lead you to believe it is better to wait because your selling price may be low. This is a solid concept in most cases, but does not always apply to selling a business. In fact, recent trends and studies show that now could be a better time to sell your business.

Important Trends

One major trend to consider when moving forward on selling your business is the aging of the baby boomers. As the baby boomers begin to hit retirement age, more and more business owners will be looking for an exit strategy. The best projection to really drive this point home is from the Exit Planning Institute. They expect roughly 8 million private U.S. companies to sell over the next 12-15 years as a result of baby boomers reaching retirement age. That is a staggering number and will only increase the difficulty of making your business stand out to an investor. There is only so much capital available for investment in businesses; don’t wait too long and get lost in the crowd of business sellers.

Another thing to look at is why the current supply of businesses is not meeting the demands of investors.

We can start by evaluating two simple statements.

1) In an economy characterized by low growth and high unemployment there are fewer profitable companies.
2) Investors normally prefer to commit equity to profitable businesses. Combining the two statements tells us there are still a lot of investors out there competing over a smaller number of profitable businesses. If you are profitable now, why wait for a thriving economy when there will be a larger pool of companies from which investors can choose.

The Myth of Selling Low

The next thing to clear up is the idea of selling low when it comes to businesses. It is certainly possible that an owner can sell at the wrong time and get less money than he should have.

The most obvious example is if your profits have taken a major hit in the past few years. If you believe your profits will rebound in the near future it is a good idea to hold off on selling. Investors are not going to pay for success from several years ago. They are most interested in financials from the past 3 years and what growth trends your company is exhibiting.

The important thing to remember when selling your business is that you will receive fair market value based on recent performance regardless of the state of the economy.

Bigger is Better

Right now large companies are an especially hot commodity. Investors, such as private equity groups, will pay a higher multiple for large companies. This is due to their inherent safety versus smaller businesses.

When buying businesses investors typically offer a number based on a percentage of sales or EBITDA x multiple. EBITDA (also known as Earnings Before Interest, Taxes, Depreciation and Amortization) provides the buyer a rough estimate of free cash flows. The multiple the buyer chooses is based on the size of a company, the industry, and growth trends, among other things. The multiple determines the value of the estimated free cash flow your company generates. Let’s take a quick look at multiples offered to companies of varying sizes. A small business (less than $5million revenue) may receive a multiple of 3.5x EBITDA. A business with $20 million of revenue will typically receive a multiple of about 5x and finally a larger business ($50 million revenue) can bring in a multiple of 6x. These multiples show just how much more investors are willing to pay for large companies.

Big companies have another advantage right now as evidenced in a study by Axial Market. The study found that in 2011 businesses with an EBITDA over $5 million have generated three times more interest than companies with a lower EBITDA in recent buyer activity.

These factors lead to the conclusion that the supply of large profitable companies is not meeting the demand of investors. The lack of supply in relation to demand indicates an opportune time to sell.

Plan Ahead

Now may not be the ideal time for everyone to sell their business, but if you’ve been contemplating an exit strategy you should give it consideration. A common mistake among business owners is delaying the planning of an exit strategy. A good exit strategy takes time to develop and implement so it’s important to plan ahead. Now could be a great time to start prepping your business for sale before the market becomes more crowded with fellow owners looking to sell.

About the Author
Emery Ellinger is Chief Executive Officer of Aberdeen Advisors, Inc. Emery was the # 1 Top Dollar Producer in the Southeast for selling businesses in 2008 for BBN, America’s Largest Network of Business Brokers. Emery advises and sells businesses in the healthcare, manufacturing, business services, distribution and technology industries. For more information visit us on the web www.aberdeenadvisors.com or call 727.369.8204