The following is an example of how a fictitious character, Mr. John Smith
considers some real life elements which will affect when he should sell his
Mr. John Smith, CEO of ABC Inc. is a
successful businessman with 30 years of experience in his field. He's in
his late 50's and can comfortably start thinking about retirement. After
a recent luncheon with his accountant, Mr. Smith has become increasingly
convinced that it's a good time to sell his business.
Interest rates seem to have capped off for the time
being, no telling how long that may last. Buyers want to buy when the
interest rates are low. This way they can earn a higher rate of return
from running their business. If interest rates increase in the future,
the cost of borrowing money increases, thus reducing the value of his
business. So as far as Mr. Smith is concerned, selling when interest
rates are low, means his company is worth more.
John is aware that private equity firms have in the
past, and continue to raise funds when they are in need of companies to
invest in. For better or for worst, right now, there is more money out
there than there are companies to purchase, which is why the price of
businesses continues to rise.
He mulled over these thoughts in his head as he drove
home to discuss his recent idea with his wife Marlene. She knew he had
worked hard over the years to establish ABC Inc. and they both had been
waiting for an opportune time to think about retirement. John knew that
it wasn't as if he was still young, there were lots of factors to
consider. Were he younger, he would have the advantage of youth, an
added motivation and a higher energy level to maintain the successful
enterprise. Twenty years ago, he could even have put his money into
another enterprise and started anew had he wished.
As he pulled up to his quiet suburban home, he smiled
as he saw Marlene greet him at the front door. He knew he could always
trust her advice, as she taught economics at the local university. Upon
hearing everything John had to say, Marlene shared some news of her own.
She had recently heard the rumour that the Canadian government increased
the $500,000 capital gains exemption to $750,000 for transactions
starting in mid March 2007. With deep concern in her eyes, she looked at
her husband and said "John, you can either crystallize your exemption
today, or sell the company while the tax incentive is still available."
"Not only that, but competition in the market is
always increasing. With time, it will inevitably cause the value of the
company to decrease. Why wait for it to eat up the value of your hard
John knew Marlene had a point. She continued, "Dear,
you know that when the economy is good, people spend money on both
consumer goods and businesses. Alternatively, when the economy is weak,
people tend to conserve their money, especially if they are already in a
business. They do this in order to be able to sustain a business
downturn. In short, the time to sell is when the economy is good."
He knew what she was referring to; the global
environment certainly influences the economic cycle. He had a good run
the past few years, and he could easily show potential buyers continuous
profitability over consecutive years. Just like his accountant had
advised him, he had profitable financial statements, order books full of
orders, and based on the previous three years, a healthy projection for
the following three years.
While John continued to ponder over these thoughts,
Marlene looked him in the eyes and said, "If corporate taxes go up, at
the end of the day, less cash will be available. If less cash is
available, it means the value of the business has decreased." Pausing
only long enough to flash him that same smile that had won his heart all
those years ago, she continued, "taxes dear, more often than not, tend
to increase rather than decrease. As we know all too well."
As John Smith's story illustrates,
external factors will always be there. The prudent business seller looks
to use these factors to their advantage. Internal factors vary from one
business owner to the next. A healthy consideration of the two is needed
to determine when might be the most opportune time to sell your
business. The external factors are presently all favourable and indicate
that now is the best time to sell your business. With a strong equity
market and interest rates stable, now is a great time to cash in on many
years of hard work, and sell your business.
What does a higher EBITDA (earnings before interest, taxes,
depreciation and amortization) mean?
Higher earnings because of higher sales or less costs
will increase the value of your business.
Will your margins be going up or down?
If there is going to be some improvement in margins
either through operational efficiency or new technology, you may want to
wait and sell your company. This will allow you to prove the margins are
actually going to increase. Higher margins increase the earnings of the
company and hence its value.
Will your sales go up or down?
If sales are going to increase because of a major new
customer coming on board, or you are going to introduce new products or
services that will increase sales for your company, then you should wait
to sell. This will allow you to prove the sales growth, rather than
trying to convince a buyer it is true. If sales are flat or increasing
moderately, there is no real need to wait and sell.
Are you motivated?
If you are the owner and believe you will have more
energy and a higher degree of motivation towards the business in the
future, then you should hold off. This will in turn translate into a
leadership for higher sales and profitability. If you think your energy
level towards the business is going to decline, then you should sell
when things are better, as the performance of the business will take
lead from the level of motivation of its owners.
Do you have a written business plan for growth?
In a small business environment, most businesses do
not have a formal written business plan. However, if you are among the
few organized individuals who do have a written business plan with
projections for future earnings, this will help the buyer evaluate your
business more effectively. In turn this can result in you getting a
higher price for your business. A business plan, also acts as a road map
to future growth and profitability. So if you have one, and you execute
it, your business will most likely be worth more. If you do not have
one, it may be better to sell now, as there may be no road laid out for
the growth or value of your business.
Are you planning on offering any additional
products or services?
Products and services are driven off of your
earnings. If you foresee something that will increase your bottom line,
it will inherently also increase your value. For example, if labour
costs are going up, insurance is going up, and sales are wavering, this
may be an indication that now is a good time to sell your business.
How are you going to save the company? Is what you
have planned to execute, going to impact your growth?
Have you freshened up the appearance or décor?
Appearance and décor are more important in a retail
business environment with walk-in foot traffic. Obviously a more
pleasing and attractive surrounding will make a visiting client more
comfortable, and therefore invite them for repeat visits, translating to