When Should I Sell My Business?

When Should I Sell My Business?

Every business owner I have ever known, has sought to sell their business at the top of the market. I think this is part of the movement where many are in a constant quest to outdo others. While conceptually I understand this desire, these owners should heed the voices of some sages.

Daniel Kahneman’, “The average investor’s return is significantly lower than the market indices due primarily to market timing.” 

Warren Buffett, “Trying to time the market is a fool’s game.”

Baron Rothschild, “You can have the top 20% and the bottom 20%; I will take the 80% in the middle.”

 

What it takes to Sell at the Top of the Market

If you are determined to sell at the top and are ready to step aside at any time, the only concern is timing. However, if you have other timing considerations, e.g., retire when my business is worth $X, step aside when I am 65, then things are far more complicated.

For the market to be at the top when you reach some predetermine criteria, you need to ensure that the entire economy collaborates with you. To do this, I expect you would need to have the ear of: 

  • the President, 
  • the majority of Congress, 
  • the Chair of the Federal Reserve, the Secretary of the Treasury,  
  • the President of the European Central Bank, 
  • the German Chancellor, 
  • the President of France, 
  • the President of Russia, 
  • the President of the People’s Republic of China, 
  • the heads of the People’s Bank of China, and
  • the leaders of all the leading investment banks and hedge funds worldwide, to name a few. 

Not only would you need their ear, but you would have to persuade them that collaborating with you is in their best interests as well. Furthermore, many of these people would want something in return for a favor, and most of the people I have spoken with would be able to afford the price Vladimir Putin would expect. Finally, I have found any scheme where only one person knows of it but requires many people to ensure its success is bound to fail.

As a result, I would say that trying to sell at the top is a fool’s errand and one that should be abandoned.

 

A Contrarian View

Some have argued that selling at the bottom of the market makes more sense. The rationale is that the business owner will reinvest those assets into other assets whenever they sell their company. Thus if you want to ensure continued wealth accumulation, one should do it at the bottom of the market rather than the top.

To examine this theory, I did a simple analysis. I reviewed four dates and the market conditions. I looked at the Russell 2000 Price Earnings Ratio for those dates and indexed them with the 2000 Price Earnings Ration as the base = 100. Assuming that enterprise value (EV) to EBITDA ratios followed the Russell 2000’s PER, the EV/EBITDA ratio in 2000 was 5x, and the company had an EBITDA of $1 million in each year before the sale, the results are as follows:

Date Market Conditions Russell 2000 PER (Indexed) EV / EBITDA Multiple Proceeds ($k)
12/31/2000 After the Top of the market 100.0 5.0 $5,000
12/31/2005 Near the top of the market 58.6 2.9      $2,929
12/31/2010 Emerging from a recession 52.6 2.6 $2,631
12/31/2015 Middle of a bull market 74.7 3.7 $3,734

I then made a few more simple assumptions:

  • Transaction costs to be 30% comprising intermediary and legal fees of 10% and taxes of 20%.
  • The proceeds are invested in two funds, VFIAX – Vanguard 500 Index Fund Admiral Shares and VBMFX – Vanguard Total Bond Market Index Fund Investor Shares as proxies for a general stock and bond market investment.
  • The allocation is 70% into VFIAX and 30% into VBMFX.
  • Any funds withdrawn and any distributions are ignored as they would be the same for both funds.

Below is a chart of the S&P 500 from December 31, 2000, to December 31, 2020 to show the market’s performance over the period.

Source: Yahoo Finance

Following the investments as described above after five, ten and fifteen years the returns were:

Date Initial Value ($k) After 5 yrs ($k) Return (%) After 10 yrs ($k) Return (%) After 15 years ($k) Return (%)
12/31/2000 5,000 4,822 -3.6 4,930 -1.4 7,027 40.5
12/31/2005 2,929 2,993 2.2 4,292 46.5 5,414 84.8
12/31/2010 2,631 3,790 44.0 4,786 81.9    
12/31/2015 3,734 4,643 24.3        

 

So as it can be seen, while selling at the top, provided the greatest wealth after fifteen years, interesting the difference over 10 years was less than 3% between selling at the top and selling just after the bottom. The other points are somewhere in between. Therefore, selling at the top is not the conclusive answer we expected.

 

So what to do?

What I have always advised clients is to build a business that is attractive to buyers and can be sold. The key is to create your own redundancy, so that you can sell it, stay in a non-executive capacity and effectively “coupon clip,” or pass it on to your children or employees. You have many options and if someone comes along and offers you “silly” money, take it. But don’t worry about the “Top of the Market.”

If you want to know if your business is sellable, complete this questionnaire, and if you want help building a sellable business, contact me.

Copyright (c) 2021, Marc A. Borrelli

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  • There is a common belief that we control our lives and destiny; however, if we are objective, we can see that luck is an important determinant, and life is Uncertain. Recently, the uncertainty of life was brought home to me twice. A high school friend of mine, Marty Davis, owned a scrap metal business, and we had recently reconnected after 35 years through Facebook. We planned to get together soon as he was now living in North Carolina. A week later, I learned that a palette of copper had fallen off a forklift truck, killing Marty instantly.

  • A month ago, a member of my Vistage group, Mike, an ex-marine and fit in his 40s, pulled over on I-75, not feeling well. He suffered a major heart attack and was dead by nightfall.

Life is Uncertain, but are we ready for it? In most cases not, even Prince wasn’t, dying with no will, albeit a plethora of advisors surrounded him. However, Uncertainty is more than death; it includes Disability, Divorce, Partner Disputes, Running out of Energy, etc. There is no excuse for not being preparing for Uncertainty! Also, the disregard it shows to your family and employees is undoubtedly not the legacy one wishes to leave. If you are “Sell Ready,” it doesn’t matter in what form Uncertainty arrives, you will be positioned to survive.

So what is Sell Ready? I define Sell Ready as those companies that realize a price higher than their value. As Warren Buffett said, “Price is what you pay, Value is what you get” so for a seller I take that to mean, Price is what you get, and Value is what you give up, i.e. in 2008 at the height of the crises, Ford debt was selling for 35 cents on the dollar – price definitely less than value. On the other hand, HP’s acquisition of Autonomy for $11.1 billion, 79% premium over market price – price exceeding value. If you are Sell Ready, you want to be like the Autonomy shareholders.

I will expand on “Sell Ready” and what that means in future posts, what it is, how to be “Sell Ready,” and the benefits. Stay Tuned.

 

© 2016 Marc Borrelli All Rights Reserved

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“Why don’t they use common sense?!” You may have said this phrase yourself, or heard it with your managers, when discussing an employee’s actions. However, the frustrated appeal to “common sense” doesn’t actually make any meaningful change in your organization. We all make decisions based on the information we have and the guides we have to use. So if the wrong decisions are being made in your organization, it’s time to examine the tools you give decision-makers.

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Bringing in new ideas, thoughts, understanding, and logic is key as your organization faces the challenges of a changing environment. But when you do an ideation session in your organization… how does it go? For so many organizations, many times, after a few ideas have been thrown out and rejected, the thought process slows down very quickly, and a form of hopelessness takes over. How does your organization have better ideation? I’ve come across a new approach with a few teams lately.

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If your organization is focused on obscurity over clarity, whether intentionally or not, your “A” player employees are vulnerable. There is a looming talent crunch. As we start to emerge from COVID, demand is increasing, and many are scrambling to fill positions to meet that demand. Headhunters and recruiters are soon going to be calling your key “A” employees. Have you been giving them a reason to stay?

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Let’s start here: Why should your company be scalable at all? If your business is scalable, you have business freedom–freedom with time, money, and options. Many business leaders get stuck in the “owner’s trap”, where you need to do everything yourself. Sound familiar? If you want a scalable business that gives you freedom, you need to be intentional about what you sell, and how.

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Companies are gearing up to hire. Unfortunately, many are competing within the same talent pool. Some experts are currently predicting a strong economic recovery starting in May or June. But as the economy booms, there is going to be fierce competition for talent. How will you fare in the looming talent crisis? Your organization should be creating a plan, now, so you can attract the talent you need in the year ahead.