Timing the sale of a business can be difficult. You don’t want to go out on top because a buyer doesn’t want to ride it down from there. But it pretty hard to sell on the way up because it can be fun and rewarding ride – who wants to give that up? However to receive full value you need to sell before the top, when there is still some unknown potential that can get buyers excited about the prospect of growth. Here is the tale of two companies:
We had a client last year (yep, in the middle of the recession) that was growing and in an alternative energy field. President Obama came into office and promised more funding and focus on his area, and it was extremely difficult to nail down how much continued growth this company would experience. But there was no question it would experience significant growth. A company offered around 6 times EBITDA, but with another company interested and the bidding stopped at 12 times EBITDA. Could the owner have kept it and grew it himself to take advantage of the growth? Quite possibly. But you never know what could happen…
The Bad (and the Ugly)
We provided an opinion of value to a company in 2006 of around $7 million to a husband and wife team that owned a steel fabrication company that provided product to a number of companies, none of which were more than 15% of their business. The husband wanted to sell, but the wife wanted $10 million. She convinced her husband that things were going well, and if they waited just a few more years and grew earnings a bit more, they could have their $10 million. Well, it turns out they had a number of customers, but almost every single one was an RV manufacturer. In 2008 the company declared bankruptcy and closed its doors.
I know, it is far easier in hindsight to correctly time a sale. However sometimes we can see a situation developing, but we can’t convince the owner, often because our opinion is being written off as those of sale-happy brokers. We have a client now that seems to have a business based on technology that will may be obsolete in the next 10-15 years or so. He wishes to sell, but his partner refuses to. We can see it coming. They don’t have to wait 10 years for the business to be damaged and hard to sell, they only have to get to a point where the end is visible.