Ultimately there are many factors that can determine when to sell a business. At the top of that list are factors including the market and how well your business is currently performing. Succession planning and having an exit strategy are important first steps to help determine when is the best time to sell a business.
While you cannot predict or control what the market will do, there are certain criteria that should be in place before you sell as part of your overall exit strategy.
Top factors that determine when to sell a business
Having clean financial records
A potential buyer will need access to financial records as part of the due diligence process. There is nothing that derails a potential sale quicker than a lack of accurate and complete financial documents.
Before listing your business for sale, get all financial records in order so that potential buyers have a clear snapshot of the company’s current state.
Having a reliable operations team in place
Buyers will want to see an operations team that can function and flourish without the day-to-day oversight of the current business owner. Having a strong, self-sufficient team in place is a strong selling point and an important consideration when determining if a business is ready to sell or not.
Being able to demonstrate stable earnings
When calculating your business valuation, brokers will typically review previous tax returns, balance sheets, and profit and loss statements. The ability to demonstrate, with hard numbers, that the business is on a financial incline is important when timing the sale of your business.
Potential buyers will want to see three or more years of increased financial growth. This is a good indicator of future growth, which will generally yield a higher sales price.
Indications of future growth potential
If the past couple of years has taught us anything, it’s that you can’t predict everything. When it comes to assessing your company’s potential for growth, the strongest indicator will be past growth. But buyers will also consider other factors, including resilience, when determining future growth potential.
Surviving the pandemic could be considered a type of stress test. Businesses that managed to weather the storm may be viewed positively by potential buyers.
Is now a good time to sell a business?
Given the extraordinary challenges businesses have faced over the last two years, many predicted a protracted slump in business sales. To many experts’ surprise, the current market is very good for business owners who are in a position to sell their business now.
It is a seller’s market
Back in 2018, the Canadian Federation of Independent Businesses (CFIB) estimated that 72 percent of its 95,000 members hoped to sell their business over the next few years. Fast forward a few years (and factor in a global pandemic) and many business owners have decided to delay retirement in order to recoup diminished business value.
A survey released by the CFIB in March of 2021 reported that 42 percent of business owners say that they will retire later due to the pandemic. Postponing retirement is one factor that is fueling the current seller’s market with low numbers of businesses for sale on the market.
Increasing demand from business buyers
In addition to the reduced inventory of businesses for sale, demand has remained high and continues to climb. Specifically, private equity players have been focusing on more small businesses than ever before.
And despite projected interest rate increases, financing remains affordable and is not expected to reduce demand from buyers.
Overall business sales prices are on the rise
While some businesses will need some time to reestablish revenues to pre-pandemic levels, many owners have seen a resurgence in business value partly due to pent-up consumer demand.
In a recent Globe and Mail article, Steve Chen, head of First West Capital, noted that:
“There’s a lot of financing available for purchasers, and valuation multiples are rising. It’s deal-specific and maybe region-specific, but I would say those are the overall trends. It is a good time to exit your business; if that’s something that you were contemplating.”
Is it time to sell your business?
Business owners who stand to gain the most by selling a business in a seller’s market are those who have already done the groundwork to ensure they are well-positioned to sell their business.
Even in a seller’s market, it is important to have clean financial records, a strong operations team, sustainable revenue, and potential for growth when selling your company.
Need exit-strategy advice or looking for a Broker Opinion of Market Value? Contact us.