In some ways, timing the sale of your business is like trying to time when to buy and sell stock. Although it can be hard to guess what the overall market trends will be that may affect your business, there are other trends that can be obvious. Health issues, burn out, partnership problems, family issues and others can all lead to a downturn in business. If left alone, they can destroy the value of a business well before the business itself crumbles.
Twice I’ve had business owners call with serious health problems. In both cases the owners waited too long. In both cases I tried to help them and in both cases I failed to sell their business. It was a lesson for me, because I spent a lot of time working on those engagements. Not only didn’t I make any money for my efforts, but I wasn’t able to help them.
Even if I believed that their illness led to the decline in business, a potential buyer still wonders. For me, there is only the risk of not making any money. For a buyer, they will often spend their entire life savings to buy a company, so the risk to them is enormous. They see the decline in business, and it is probably the owner’s illness, but what if it isn’t? What if they can’t bring up employee moral? What if they can’t bring back customers? It was too much risk, and the potential buyers we found just couldn’t make that leap.
It was painful to see. However, these owners should have sold well before the company got to that stage. I get calls from quite a few others that for various reasons watch their company slide downward for many years. Often by the time they call there isn’t a whole lot we can do for them.
You can think of this as “working for free”. A business owner that hangs on to their business too long often loses far more value from the business than they make in salary during that time. Say a business is making $300K in earnings per year, and his multiple is 3x at that point in time, so the value is somewhere around $1 million. He just plain burns out (it happens), and he starts going on extended trips and isn’t paying attention to the company. Within three years it is now doing $100K in earnings and he decides to sell. He took out about $600K during that three years, but the company is now worth far less than $300K (multiples are lower for lower earnings, plus who wants a company on such a steep slide?). He just worked three years for nothing.
He can’t understand why I (as the broker) can’t price it at $1 million and just explain that he was burned out and a new owner would certainly be able to bring the company back. Unfortunately it just doesn’t work that way.
It is hard to guess the top of the market. But it isn’t nearly as hard to see a downward trend starting by a problem that new ownership could fix. The tough part is acknowledging the problem either by fixing it yourself, or selling the company before it loses its value.