When is it a right time to sell a company

A financial consulting company recently had a client who had intentions of selling his business for a long time but was unable to decide when to start. His big dilemma was that he was expecting to be rewarded a government contract and believed that his business would be worth substantially more once that happened. The seller did not want to put the business in the market until the contract came through. Sounds like the right thing to do, doesn’t it? 

The firm's advice in this and similar situations is for the business owner to consider the trade-offs of starting the business sale immediately as opposed to waiting until the “big sale” closes.

First, let’s look at this type of contract from a potential acquirer’s perspective:

Ø  If the company that is being acquired has recently landed a big contract, how desirable is it and how much life is left in the contract? 

Ø  If the company has not gotten the contract but is likely to get it, what could it be worth?

Ø  Is this contract potentially a large percent of the company’s revenues and does the contract pose a material risk to rest of the company if something were to go wrong?

Ø  What is the economic benefit of it going forward? Is this contract a sustainable one or is it more of an aberration? 

Now, let’s look at the contract from the business owner’s perspective:

Ø  What is the lead time for the contract? Assuming delays or disruptions, which are common for big contracts, does the business owner have the time?

Ø  What if the business owner does not get the contract or, worse yet, the process drags on? How will it affect the company’s operations? How long can the seller wait to recover?

Ø  What are the chances that this contract will materialize or that there will be another bigger deal on the horizon after this deal? What does history say about how the company grows?

Ø  Between now and the anticipated close date of the business sale, is the competition getting stronger? Is there new competition?

Ø  How about the market? Are there any fundamental changes that are likely to happen over the next few years? Are there big investments needed to continue growing?

Ø  Is there any potential upside an acquirer can bring to the deal? Is it more likely that the company will get the contract with the current management or with the acquirer? 

So, what should the business owner do once the trade-offs are understood? The critical element to consider in this situation is the reason why the business owner wants to sell the business in the first place. Does the business owner not have the energy to continue driving the business aggressively? Is he/she under any time pressure for health, personal, or other reasons? Whatever else the reason may be, is it still valid? If the answer to any of these questions is “yes”, now is the time to put the business sale process in motion.

When it comes to waiting for a big sales contract before you sell your business, consider the trade-offs before you make a decision.