In the next ten years, $1.6 trillion in wealth will be transferred because of the retirement of Australian family business owners.  Many of these are substantial, multi-million dollar businesses.

This will lead to a tsunami of businesses being put up for sale as baby boomers seek to cash out and fund their retirement all at the same time.  Should you simply ignore this phenomenon and hang on?  Or should you get ready for sale now?

The issues behind the decision to sell are as valid for 35 year old tech founders as they are for 55 year old traditional business owners.

Two Reasons to Prepare for a Sale Now

There are two reasons that you would want prepare in advance for a business exit:

• The first is a conscious decision to go out to the market to sell the business.
• The second answer is not so obvious, but it is this: to be prepared if an unexpected and irresistible offer simply lands on your desk.

In both cases, you need to be able to move quickly before a possible deal evaporates.

The Objective Test for Deciding to Sell

Success in growing a business often comes from astute subjective judgments.    There is, however, a deceptively simple objective test to decide whether to sell your business:

• It is whether the sale price of the business is greater than the value that the shareholders will derive if they continue to own it.  

Naturally there are all the other corporate and personal reasons for a business exit, but this is the objective test.

Large companies usually consider the divestment of a business according to set criteria.  In that sense, their decisions are quite dispassionate and objective.

In private companies, however, one reason that businesses don’t sell at the best time is that owners never consider the matter objectively, or they delay doing so for too long.  Many business owners are too busy in the day-to-day running of the business to fully commit to the process of deciding to sell.

Others do not want to let their competitors know that the business is for sale.   Either way, the owners don’t enrol outside experts or key staff in the business exit process and therefore they cannot pursue the exit option with sufficient energy.

Gradually, the option to sell slips away.

The Three Best Times to Sell Your Business

How do you know when it is the best time to sell your business?  How do you know when to take decisive action?  As it happens, professional investors say there are the three best times to sell a business:

• At the Top of the Business Cycle

The top of a “business cycle” might be a general boom in the economy, but it may also be the top of a cycle in the sector or sub-sector in which the business operates.  Unfortunately, a sector like the car industry is not at the top of a cycle, so there is no frenetic acquisition activity going on at present.  It is not, however, just the entire sector you look at.  You look at sub-sectors or even niches to see if that sub-sector or niche is at or near the top of its particular cycle.

You can also consider selling in the top of another business cycle.  Who do you sell to?  Is their sector at the top of a cycle? Who do you buy from?  Is their sector at the top of a cycle? If your customers or suppliers are at the peak of their business cycles, you might be an attractive acquisition target for vertical integration. So a savvy business owner might be asking, “What other sectors are booming right now and how can I find interested buyers in that sector?”

• When an Irresistible Offer Comes Through the Door

To tell if the offer is truly “irresistible,” ask yourself:

• “Will more value will be generated by accepting the offer than by continuing to run the business?”

“Irresistible” in this sense is objective.  It could be a high offer that exceeds the net present value of the cash that the business could have generate for you in the coming years.  At the other end of the scale, it could be “irresistible” in the sense that it is a low offer, but it staves off an impending insolvency or frees you to pursue other ventures.

Another way to view this is to ask yourself, “If I took this offer, would I make more money by investing it than continuing to run the business?”  For example, if your business was returning 20% ROI year on year, then you would be hard pressed to find another investment that gave a better performance.  In this case, you probably would not sell.  If, however, the business was losing money year on year, you would make more money for less effort by selling and just putting the proceeds in a term deposit.

• When the Business Cannot Expand (or Function) any Further Without New Capital

In the case of a business requiring new capital, it can be time to sell your business if that capital cannot be obtained, or your available capital needs to be deployed elsewhere, or the capital comes at too high a price.

In these situations, you don’t necessarily have to sell the entire business.  You can do a capital raising, which selling a percentage of the business and retaining the rest.  If you have land and buildings you can sell them and lease them back.  If these are not options, then it is probably time to sell the lot.

The Worst Time to Sell Your Business

The worst time to sell a business is usually when you have delayed the decision for so long that you don’t have any other option.

Summary

Having your business ready to sell is necessary if you are going to market now – and also if you want to be ready for an irresistible offer that might land on your desk in the future.  Although business success is often built on canny subjective judgments, you need an objective test to decide whether or not to sell.

Remember, selling at the top of a business cycle doesn’t necessary mean at the top of your business cycle, an irresistible offer isn’t necessarily a high offer and selling the business doesn’t necessarily mean selling 100% of it.