Over the years countless business owners have told me that they would like to sell their businesses, but won’t do so until it has reached its apex in terms of growth and profitability. It’s counter intuitive, but this is the wrong strategy if one wants to maximize their company’s value.
I understand an owner’s desire to maximize their buyout. What many owners don’t realize is that strategic and financial buyers will pay more for businesses that have not yet reached their top. It is important for buyers and their financing partners that the business acquired will continue to deliver at least a couple of more years of strong revenue and profitability growth. Absent a strong growth outlook, buyers will discount the amount they are willing to pay for a company.
Owners, don’t fool yourself into thinking that you can bamboozle buyers into believing in unreasonable growth prospects. Buyers of middle-market business are sophisticated. Their due diligence is thorough and disciplined. They will perform a detailed analysis of your industry’s prospects and will independently determine your business’ growth and profitability potential.
We live in an increasingly unpredictable world. Unforeseen events can quickly impact a business’ profitability outlook and cause buyers to step to the sidelines. Owners in their late 50s and 60s that are inclined to wait for the top to sell, should carefully consider the impact of an unforeseen event on valuation, their desired transition date, or their ability to sell at all. One just has to look back to late 2008 when the financial crisis scuttled most merger and acquisition deals in progress and many business’ values quickly fell by 25% to 50%. A significant number of business owners who were holding-out to sell “at the top” in 2009, still own their businesses because in many cases, valuations haven’t recovered to what they were previously. Some businesses never recovered from the financial crisis and are now defunct.
In summary, it is alright to be greedy but not too greedy. Leave some growth and profitability upside for the buyer in order to get a deal done and move on to enjoy the next phase of your lives. Be well!