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Backwards Exit Timing and Unrealistic Valuation

07 Jun Backwards Exit Timing and Unrealistic Valuation

When is it the right time to sell a business? Many business owners seem to have a backwards or mixed opinion on the appropriate time to sell. If you want to get the maximum value for your business the right time to sell is not right after you have hit a peak and are starting to decline in profitability, it is not after three years of loses and declining profitability, the best time to sell is after about 3 straight years of increasing profits.

Exit Timing

Back in 2006 many business owners were considering selling their businesses. This, obviously, would have been a good time to sell because the markets were at a peak. Of course, that is always easy to say looking back because for all we knew then, the business could have been worth much more if the markets just kept moving up. The point is not that we knew what the markets were going to do, but rather, it is that we knew that over the previous years businesses had been profitable. That is a good time to sell.

Once the markets went down hill some owners saw that they may have to go out of business unless they are able to sell, so they put their business on the market. Again, bad timing. Now that the markets have been doing okay, if you dare call it okay, for the last few years, business owners are beginning to have hope in the future so they are holding of on the sell of their businesses in hopes that the value of the business will keep going up. The problem is that many will hold on till it is too late. The best time to sell is when the profitability has been increasing for three years and a bright future is ahead. Not when it starts losing profitability.

Unrealistic Valuations

Part of the reason many of the owners did not sell in 2006 was because they were talking to a friend or an acquaintance who said that the value of their business is 8x or 10x EBITDA. Then they speak with a valuation advisor that says the business will sell for 4x or maybe 6x EBITDA, of course they believe their business is worth more because of the unrealistic expectations they have already established so they hold off for a little longer in hopes that the market will continue to raise, but then it dipped.

Now that they have accepted the fact that they will not get a valuation at 10x EBITDA, they are hoping to get a valuation at 6x EBITDA, only the markets are no longer paying out 6x multiples, they are paying between 3x and 4x multiples. So they hold onto the business hoping that the markets will come back.

The Solution

A wise man once told me that if you were comfortable doing a deal at a given value, then do it and don’t worry about the benefits others will receive in comparison to you. This can be translated into value expectations for selling your business. If you decide what you want in terms of retirement and how much money you what to have available on an annual basis after you sell the business then Deal Capital has the professional connections through it partners that can help you to see the value that you need to sell the business for.

Once you have your wants and needs in place we can help you determine how much you should sell your business for after taxes and fees to reach those goals and dreams. If after discussing those needs with one of our M&A professionals and valuation consultants you find that your business will sell now for the amount you need to meet those expectations, then why not sell now? Of course it is in our best interest to sell your business for the maximum value possible, but we suggest that you do not wait another five years to a decade to get the value you are looking for, especially if you are one of the baby boomers who is approaching retirement in the near future.

Troy Jenkins
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