Should you sell your business during a changing or uncertain environment?
This is an important question for business owners, because selling early in a business cycle can be critical. There are circumstances where it is best to sell, and a few factors to weigh first. Selling a business might seem like a bad idea — some businesses earn less during trying times — but it may not be the worst option. Because some businesses lose value or do not survive, owners might get the best return on investment (ROI) from selling. The percentage of businesses that stay open declines with age, and a period of poor results can be the final straw.
Why might a business owner sell during a downturn or shift?
1. The business sees an increase in sales — rising sales make a business more appealing to buyers; for example, affordable, low-priced goods stay popular as buyers seek bargains and shift away from expensive competitors
2. The business specializes in necessary goods and services — if products and services are necessities for end customers, the owner experiences minor impact and the business will sell in any environment
3. The business sees a reduction in sales — sometimes selling is the best way to earn an ROI; if sales fall, the business may cost more to keep, and accepting a lower sale price can prevent losses from accruing as environmental forces encroach
4. The business was already ready to sell — if the owner was already planning to sell when conditions changed, it is usually best to proceed as planned
Why might a business owner NOT sell during an environmental shift?
1. When fear is driving the sale — never let fear dictate a business decision, especially a sale; a changing environment does not guarantee a drop in sales or value
2. When the owner is still enthusiastic — if you remain enthusiastic, it is worth working through trying times; tough operational and staffing decisions can set the company up for long-term success
3. When there is potential for growth — with capital or continued access to capital, an owner can convert difficult conditions into a period of growth by purchasing smaller adjacent or rival businesses
What factors should you consider before selling?
- Culture and people — recruiting, selecting and retaining a strong management team is an important part of preparing for a sale; a great culture and good management practices help ensure a successful sale to the broadest possible buyer audience
- Strategic options — shareholders should understand the consequences of where they invest their time and resources; only then can they best understand their strategic options
- Independent valuation — have an independent third party conduct a business valuation; understand both the asset-based approach (ideal where value is concentrated in specific objects or properties) and the market approach (focused on competitive advantages)
- Performance and benchmarking — how the business compares to its peer group on economic model, customer loyalty, reputation, revenue growth, gross profit margins and operating efficiency all contribute to value creation
- Timely, accurate reporting — accurate performance data from the rolling last twelve months and previous three fiscal years informs the owner and helps third parties understand the business, providing evidence of positive cash flow and healthy margins; strong internal reporting in a shifting environment increases the odds of avoiding becoming a victim of conditions and attracts more interested buyers
- Competitive advantage — organize and highlight aspects of the business that are not easily copied or replicated by rivals
Who should sell during a changing environment?
Whether to sell during an environmental shift comes down to the state of your business, your industry and the niche you market to. It is usually best to sell a business early, and preparing the business for a sale is crucial: build a stable, dependable management team and invest time and resources in assets or features that increase value. To understand which qualities matter for your specific business, start with a business valuation.
Key facts: selling during a changing environment
Core principle: it is usually best to sell a business early; preparation is crucial
Reasons to sell: rising sales, necessity goods/services, falling sales (to protect ROI), already ready to sell
Reasons not to sell: fear-driven decisions, continued enthusiasm, growth potential through acquisitions
Key factors: culture/people, strategic options, independent valuation, peer benchmarking, timely reporting, competitive advantage
Valuation approaches: asset-based (value concentrated in objects/property) and market (competitive advantages)
Reporting: rolling LTM plus three fiscal years of accurate data informs valuation and attracts buyers
Disclaimer: This article is for general informational purposes only and does not constitute legal, tax or financial advice. Consult qualified advisors regarding your specific circumstances.
