The Time is Right: When to sell your company
A framework for evaluating when you should sell, including personal, company and industry factors.
Put a group of business owners in a room, and the conversation will quickly turn to:
Should I sell this year, or wait? Do I take my chips off the table now, or keep running the business and maybe sell later?
Have you ever had that thought?
Maybe you've had a tentative acquisition approach which triggers the question in your mind. Or maybe you have just been privately mulling this over for a while.
In this article, we will give you a framework for making that decision and tips for how to proceed.
Expected Value
If you spoke to an economist, they would tell you that this is a simple calculation of Expected Value.
Which is likely to be worth more, all things considered:
1️⃣ Cash today, guaranteed
2️⃣ A chance to sell later (maybe for more, maybe less or not at all)
Expected Value is a good way to start thinking about this question. But how do you know if the business might be worth more later? And if you'll even be able to sell it?
Plus, it's far more complicated and nuanced than that...there are many more factors which need to be considered.
Let’s break them down.
Personal
👉 Motivation
Do you have the energy and motivation to keep running the business?
If you commit to another phase of owning and growing the business, you need to have the energy to back that up.
Growing the team, launching new products, flying around to meet customers, handling investors… Do those projects still excite you? Do you enjoy the day to day? Are you still excited by the mission?
It’s normal to keep some fatigue along the journey. The role of CEO or business owner is exhausting and all-consuming, and you will have days where you want to rest. It can feel selfish to invest so much in your career at the expense of other aspects of your life. You need to reflect on whether those are just occasional bad days, or a wider trend.
So honestly, do you have the motivation to do a great job and give it 100% for another few years or more? Or do you really want to spend some more time with your kids, on the golf course, or pursuing some other interests?
Your age might play a part in your decision too. If you are early in your career, feel like you’re learning a lot, and still have energy for your work… you might want to keep going. If you’re towards the end of your career you might take a different decision.
👉 Personal finances
For many business owners, their main reason to sell is financial certainty for themselves and their family.
It’s common for over 90% of a business owner’s net worth to be tied up in their company equity – especially if you’ve not sold a business before, have invested savings to start the business or have worked for below-market salary in the early days.
So you're a (multi?) millionaire on paper, but that paper wealth doesn't pay the bills.
That’s a scary position, especially as that paper value is far from certain going forward.
So it might be a prudent decision to take a sale now, even if you are confident that the business might be worth much more in the future.
👉 Time
The earlier you exit the business, the more time you have to enjoy the money. That might seem obvious, but this is an overlooked point. You also have more time for that money to compound and grow through your investment strategy. Sooner is better.
Company
👉 Confidence
How confident are you that the business will be worth more in the future than it’s worth today?
That’s a really difficult question to assess – you don’t have a crystal ball. But as the owner you have more data than anyone to think this through. You might want to have some really honest conversations with your senior colleagues to get their views too.
Here are some things to think through:
- How ambitious are your forecasts for the next 2-3 years? Honestly, how likely are you to hit those numbers? What does a more bearish forecast where you encounter some issues?
- Are there enough good new growth opportunities for the business? Are these easy to deliver, or risky (like entering a completely new market)? Might you start to hit a ceiling and the growth might slow?
- Is the current team good enough to keep growing? Are they all committed for the long run? Or are there critical hires that you need to make? That brings risk.
- Are you vulnerable to competition?
- Are you reliant on certain suppliers and customers? Could a few issues with them really harm you?
- Would a recession or economic slowdown harm the business?
If you think through these issues and risks and remain very bullish, that’s a sign that maybe you should keep going and only consider selling later.
👉 Inflection points
There are points in a business’ life where its prospects look especially strong.
Finance folks use the term 'passing an inflection point', defined as “an event that results in a significant change in the progress of a company”.
That could be putting together three great years of strong growth back to back, launching a very successful second product, winning some new high-value customers, or increasing margins significantly.
When you pass an inflection point, a buyer would be especially optimistic for the future of the business, assuming that the trend would continue in the future.
That’s a great time to sell – you will get many interested buyers and a higher valuation.
Every company has a bad year from time to time (check out the stock price chart of Apple, Amazon or Microsoft and you will see big dips). You will too.
Sometimes by waiting a few years after an inflection point, your bullish trend ends, the optimism drains away and that ruins the valuation or chances of sale.
👉 Ticking boxes
There are common factors that buyers are looking for when evaluating a business. They need to see evidence that you are a safe bet to keep growing, increase profits, defeat competition, keep key team members and avoid pitfalls around tech, IP or tax.
They want to see some of these boxes ticked to consider an acquisition. The more ticks they see, the higher the valuation.
Examples are: a stable financial track record, strong margins, a clean and healthy balance sheet, happy customers, good supplier relationships, a trusted brand, a good and stable exec team, ownership of key IP…
It’s a useful exercise to see how many of these boxes you currently tick, and how many you might be able to tick off in a few more years.
Maybe with a few years of hard work and good results you might be able to gather up more of this evidence base and get a much better exit.
We’ve written a deep dive on this here, running through 15 key factors to consider. We’ve also put these into an interactive Valuation Scorecard.
Industry
👉 Healthy industry
You want to sell when your industry is in a strong and healthy state.
A strong market is one where confidence and optimism is high. Companies in the market are making good money, the market is growing rapidly, and so many companies want to join the party.
When confidence is high, there are likely to be many buyers, and they are prepared to pay high multiples for acquisitions. A weak market is the inverse.
There's also the overlay of the wider economy... interest rates, the cost of capital, the state of the public markets all have an impact on M&A.
In a healthy market, you will also see helpful comparables – examples of recent deals done at high multiples.
If you can point to a similar company in your market who sold for a great EBITDA multiple, that's a great starting point for your negotiation. It anchors the buyers at that high starting point for negotiations.
M&A buyers follow the crowd when it comes to setting a multiple, so they will use that data feel comfortable that they are not overpaying.
If you think your market is in a healthy state right now, and that might not last forever, that's a strong signal that you should take your chips off the table.
👉 Market risk
We’ve considered risk in the context of the business itself, but what about your industry as a whole?
Could there be harmful regulatory changes around the corner? Could there be widespread disruption, for example from AI?
The problem here is that this doesn’t just harm your business, but also the business of any potential buyer in your industry. That means they will be less inclined to take on a risky M&A deal, or just not have the means to pay the valuation you want.
That is more likely in some industries than others, so you need to weigh this in the context of your situation.
Buyers
We've mentioned the analogy of 'taking your chips off the table' a few times. But there's a major difference – can walk out of the casino at any time you like. Selling is totally contingent on buyers being around at that time.
There’s a fallacy that a business owner can just click their fingers and choose to sell. You need a buyer.
Not just any buyer, too. You want a buyer who is keen (maybe desperate) to make an acquisition, with an obvious rationale for buying you and clear synergies by integrating you into their group. And ideally more than one great buyer, so you can get into a competitive situation to bid up the price and get favourable terms.
That’s a lot of stars that have to align for a deal to happen!
If you have been approached by a potential buyer, or hear that there might be buyers in the market, you need to consider if they will still be around in a few years time.
They might have bought someone else, or their strategy might change so buying you no longer makes sense. If they themselves have a few bad years, they may pull back on M&A.
Perhaps the time for them to buy is now, regardless of the other factors above.
How Deal Structures Can Help
Sometimes, this question can get framed as a totally binary: to sell or not to sell.
But there are some deal structures which can help you get a hybrid outcome.
You can take some money off the table now to de-risk yourself, but keep some upside for later.
If you get that right, it's like having your cake and eating it too.
There are a few structures that you could use.
Firstly, you can use an Earnout. You only get some of the payment upfront, with the remainder to be paid based on the future performance of the business.
For example, that might be £5m today with another payment of up to £5m based on an agreed metric, like EBITDA over the next two years.
Worst case scenario, you have £5m in the bank today for you and your family to enjoy. That cannot be clawed back no matter how rocky the performance is. If the business does really well, you might get another payout later too.
Alternatively, you can sell only part of the business. You sell some of your shares, but remain an owner alongside the buyer. That could be selling just 10% today and keeping the rest, or selling almost all and keeping 10% or 20% back.
Like with an Earnout, you still have some upside if the business does really well post-sale.
The tricky thing here is agreeing how to sell those shares in the future. If you can't sell them at a good price, they are worthless. You would typically also agree Put and Call Options with the buyer to give you both rights to buy (for them) or sell (for you) the remaining shares at agreed prices and on agreed dates.
Remember that in both these cases you'll be tied into the business post sale, and your relationship with the buyer will be key to getting that second payment. With money still on the line, so you will need to have the energy to commit to another phase of growth even if you've taken some money off the table.
Closing
Let’s pull all this together.
There are many factor to weigh up here: your energy and personal situation, the health and growth prospects of the business, the state of your industry and the likelihood of future buyers.
Personally, the most telling factor is the first – how much gas you have left in the tank. The others are hard to predict, but you know deep down if you have the energy to keep growing the business and sell later on.
If you have that energy and don’t need to take money off the table, you feel strongly confident in the future of the business and the market, and that you will be able to find buyers later on… keep going. It’s a risk but if you back yourself then it might turn out to be your best financial decision.
Finally, remember this. Exploring a sale is a two-way door. You can start talking to buyers, explore the valuations they are offering to pay and see what feedback they have through due diligence.
If you think you could get more later, or you just don’t like the way the negotiations are progressing, it’s OK to pause the talks there and get back to running the business. Handle it professionally and you won’t harm any relationships with the buyers either.