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When Is The Right Time For A Business Exit?


This is a really tricky question.  I’ll attempt to offer a way to quantify (at least in part) when may be the best time for a business exit.

As I write this, our economy is humming along really well, and a lot of business owners who might be thinking about a business exit are holding on to their companies in order to capitalize on the growth opportunity.  I certainly understand this impulse – especially for the owners who suffered through the downturn.  It’s nice for them to finally have the wind at their backs for a little while.

No one knows precisely what the future holds for the economy.  If I could predict it with certainty, I would on a small continent by now.  However, I think we can agree that growth will eventually slow down, and we will enter some sort of a downward trend.  We all hope it’s brief and mild, but we have enough history to say with confidence that markets always correct themselves.  For many investors, these downturns represent real opportunity to scoop up good companies at a bargain.  As this happens, growth will begin again.

Because of our strong economy, the market for mid-size, privately-held companies is really hot.  Some estimates indicate that Private Equity groups in North America have well over a trillion dollars in cash (sometimes called dry-powder) ready to deploy.  This dynamic is great for business owners who are ready to sell because there are more buyers who will pay a premium price for the business.

One way that is often used to begin to determine the value of a business is to calculate a multiple of EBITDA.  (If that’s an unfamiliar term, I’ll rely on Google to fill in the gap.)  Businesses in different industries trade at different multiples, but most industries have a general expectation of what a fair market multiple would be.

So, for the business owner who is holding on for another ear or two to build the value of the company, I’ll offer a paper napkin math approach to evaluating the timing of your exit.

If your business would normally trade at a multiple of 6, and you work for a year or more to build the business and add an additional $100k to your EBITDA, at closing you could expect to gain an additional $600k based on your multiple IF everything else stays the same.  It’s the “IF” that makes the difference.

IF the economy softens, or IF the Fed raises interest rates and makes money more expensive for buyers, or IF…any number of possible scenarios takes place, and the market conditions change, that 6 multiple can very quickly become a 5 and your additional year(s) of work could be for naught.

Consider the following illustration:

If this scenario represents your business and your thinking, you should ask yourself questions like these:

  1. How long and how much work will it take to add the additional revenue and/or profitability?

  2. Will the work required be enjoyable, or will it add unreasonable amounts of stress?

  3. Will I be able to maintain the same EBITDA % as revenue grows, or will margins be squeezed?

  4. In the time that the growth will take (plus the time required to conduct an effective sale process), what is the likelihood that market conditions ill change the multiple that I am able to receive for my business?

If the sum of these answers leads you to the conclusion that the additional time and effort will have a high likelihood of paying off, by all means, carry on and God speed.  However, if you begin to work your own version of this paper napkin math and find that the juice might not be worth the squeeze, I hope you will reconsider and keep Einstein’s definition insanity in mind.

Consider one more scenario.  Let’s say that in the additional years of effort that you invest, you are only able to achieve one half of your growth goals.  This would not be unusual – we all know that growth is hard.  If market conditions change, it is possible that you could wind up in worse condition even though you grew the business.

Many who read this will have much different revenue, profit, and business conditions, but I encourage you to run this scenario for yourself with your own numbers.  You will find that the general principles remain the same.  The EBITDA multiple is an extremely powerful lever in this equation.

I’ll offer one final though.  Whenever you do determine that you are ready for a business exit, please, please, please – retain a well-qualified professional firm to manage a thorough, competitive process for you.  This will give you the best chance of a successful transaction with a good valuation, and it will allow you to focus on preserving the value of your business as the process unfolds.