Sally Anne Hughes sells companies for a living.
Her clients come to her when they think the timing is right for them to sell. Unfortunately, more often than not, the timing is not right.
They come to her when something in their life—an illness, for example—points them in a new direction and they need the time to deal with that. They come to her when the business' prospects aren't looking so good or are flat and they want to spend their time doing something else. They come to her when they are just too burned out to keep up the pace of entrepreneurship. That's the wrong time, too.
According to Ms. Hughes, who spoke to a roomful of business owners at Inc. magazine's New York City headquarters on Thursday, September 16, 2010 and the previous night at CPA firm, Rothstein Kass' New Jersey headquarters, the best times to sell are:
- When future growth looks good.
- When your industry becomes hot.
And who's buying? For companies between $1 million and $15 million, in addition to the usual suspects (private equity firms and your competitors or other strategic buyers) Ms. Hughes increasingly sees former corporate executives or Wall Street bankers who've ejected out of the corporate rat race and are looking for a new adventure. Sometimes it's the private equity or hedge funder who wants to make a personal investment event though an acquisition target is not a good fit for the fund itself.
Whoever your buyer is, deals are tougher to close now than they were just a few short years ago. Deals take about twice as long to close, up from around nine months to 18 months. And buyers are much less likely to take on risk when they buy.
Using the analogy of selling a house, it's not enough to put a new coat of paint on the house, the foundation needs to be strong, the mechanical systems need to be in good shape and so on. Where in years past, companies could be bought even without perfect systems, nowadays buyers are looking to reduce their exposure to risk every way they can. This means:
- Your customer base has to be diversified—not too much business from too few clients.
- Your key employees need to be committed to the future.
- Your inventory needs to be just right—not too much and not too little.
- Most importantly your financials need to be in good shape. Too much sloppiness or poor results in any of these areas and you'll feel it when they make their offer.
There's an old saying: run your company as if you're going to sell it. That means, run it in a way such that if an outside expert looked at your business, they'd like what they see.
So, when should you sell your company? Well, based on Ms. Hughes rough timeline from moment of inquiry to hitting the beach in The Carribean…
First, you speak to business intermediaries, such as business brokers or investment bankers (ideal for deals over $30 million). They analyze your company and give you recommendations to get your house in order.
Let's say it takes a year to get things in ship shape, the next thing your business intermediary does is circulate a pitch she or he crafts to sell your company. From there, it could take 18 months to finalize the deal. After that, you may have a period (called an 'earn out') where you have to stay behind and make sure the company and all its customers transfer over to the new buyer. That can typically be about two years. All in, it could take around four to five years to sell your company. And that's if it goes smoothly.
Is now a good time to begin this process? Ms. Hughes says 'yes.' If you think your next few years will be 'growth' years, then this may be a good time to start the lengthy process of getting your company ready for sale.
Without a doubt, however, it's about 'the number.' How much will someone offer you? And is it enough to walk away? That's what it always comes down to.
Thank you, Sally Anne Hughes of Hughes Klaiber. And thanks to Craig Rothman and Paul Rich of Rothstein Kass for contributing to the dialogue and helping us understand the importance of your team when it comes to undertaking this crucial transaction.