Is it time to sell your business?
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Many business owners think periodically about selling their companies and cashing out. But how do you know when it’s the right time to sell?
Here are three conditions to look for. If you and your company meet all of these conditions, it’s time to seriously consider transitioning the ownership of your business.
Condition 1: There is a compelling reason to sell your company.
There are several reasons an owner might look to sell their company. Assuming that the owner is voluntarily exiting the business, the rationale to sell is usually based on personal, financial or strategic reasons.
Personal reasons can include disagreements among co-workers, lack of heirs or upcoming retirement. Or the owner may simply be burnt out from running a business for many years. Some of these issues are interrelated. Often times, combined issues will compel the owner to sell.
Financial reasons, on the other hand, can include the need for liquidity or desire to minimize risk. Or the business may have achieved a certain yield or return on investment.
Finally, there may be strategic reasons to sell the business. For example, if a company is in a growth phase and needs additional resources (e.g., capital, talent, new technology or new distribution channels) to scale, the owner may opt to sell it instead. Or the owner may use a sale or merger to address some of the challenges that arise during the growth phase.
Condition 2: You are confident that the sale will meet your financial objectives.
For most business owners in the private market, selling is a means to liquidity. Many business owners have considerable net worth, but most of their value is tied to their companies. A liquidity event can unlock this equity position, reduce the seller’s risk, diversify their portfolio and free up cash.
If an owner seeks a partial exit, other financial incentives may come into play. In a recapitalization, for example, the exiting owner retains a minority stake in the business. Therefore, the owner is incentivized to help increase the value of the business while benefiting from a diminishing role that allows them to enjoy other pursuits.
It’s important to estimate a company’s value before deciding to sell it. It may seem intuitive, but the price of a business is only what the market is willing to pay. If an owner is reasonably satisfied with the estimated value of the business, it’s prudent for them to take the company to market.
Condition 3: You are emotionally ready to relinquish control.
An owner must make certain that they are emotionally prepared to let go of the business.
Generally, this concern is most significant with individual owners, especially company founders. Among the financial benefits of owning a business, ownership can pay emotional dividends as well. For example, it can boost the owner’s self-esteem, help them feel in control or allow them to receive recognition within an industry.
For many business owners, facing the emotional realities of selling a company can be overwhelming. Before taking a company to market, an owner needs to ask himself if he’s truly ready to let go and open a new chapter in life.
In summary, when thinking about selling, an owner needs to consider a number of factors. The owner needs to have a compelling reason to sell, confidence that they will achieve financial objectives, and the emotional readiness to let go of the company. While these metrics are not all-inclusive, they should serve as a baseline to evaluate whether it’s time to exit.