Wednesday, July 2, 2014

One Important Reason to Sell Your Business Now

The goal of any investor is: Buy low, sell high. This is a complicated issue when buying and selling stocks in public markets. It is more complicated when buying and selling entire businesses.  

Investors frequently miss a good chance to sell while waiting for a better opportunity – ones that may not materialize at all. Worse yet, sometimes disaster strikes while awaiting that “better opportunity,” and the whole economy goes into the gutter. Big potential profits are turned into huge actual losses.

This highlights a critical issue: if you are offering something for sale, you need a buyer who will bid a price you are happy to accept, rather than one you accept out of desperation. In a bad economy, asset prices fall because investors are less eager to pay for them.

So what about selling the ultimate investment: your business?

You want to sell your business when it is a good business to sell. Buyers want reliable cash flow, a sustainable business model, reasonable growth levels, and contracts in place for future work. 

RECESSIONS

What happens in a recession? Your clients’ projects are put on hold, or cancelled entirely. Future endeavors are moved farther away on the planning horizon. Liquidity becomes strained, spending contracts, and profits fall. This kind of situation puts downward pressure on the market price for your business. Even if your business has many fundamental strengths, the overall economic environment is a major factor in its value.

When you think about the “boom-and-bust” phases of the business cycle, it’s obviously not ideal to sell a business in a recession. 

When will the next recession occur? Canadian economic history shows business cycles lasting between 3.5 and 7 years. According to the National Bureau of Economic Research, business cycles run on average for about 69 months – slightly less than six years. This makes some people worry that the next crisis is disturbingly close.

The financial crisis of 2008 brought many businesses to the brink of disaster. That was several years ago now, and the currently feverish pace of the Western Canadian economy makes it all seem like a distant memory. It is easy to become complacent when the economy is chugging along .

For those business owners who managed to survive the economic downturn, the prospect of fighting through another recession might leave them a bit weak in the knees. This is especially true if the next crash will likely be worse than the last one, due to a range of government interventions that have made the economy more fragile.

CONCLUSION

It is better to sell your business when the economy is in the “boom” phase. Confident buyers will pay higher prices than buyers who are prevailingly negative and think the world is ending. If you worry about the next recession, now might be a good time to test the market for your business sale.

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Wondering if you have a sellable business? Contact the MAXIMA Group for a consultation. We focus on privately held companies with annual revenues of $3 million to $60 million. We also advise larger public and private companies on buy-side engagements.