Best Time to Exit: Can you sell too soon?

When is the right time to sell your business? This episode explores the key factors that influence timing, from personal goals to market conditions. Learn how to identify if your company is positioned for a strong sale, why selling "too soon” might actually be best, and how industry trends impact valuation. Gain practical advice on enhancing your business value and preparing for a successful transaction.

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TRANSCRIPT:

Welcome to Integrated Insights with ICCG. For more than 30 years, our team has

partnered with small business owners to prepare for and navigate the business

transaction process. Pull up a chair as we share stories and insights from our

experience on all sides of the M &A table. All right, welcome back to the podcast.

Today, we're going to be talking about selling and what it looks like to sell and

then what kind of questions we get. And so let's just go ahead and dive in. One

of the questions that we've most frequently get is when is the right time to sell?

And so, Grant, Andrew, take it away. Yeah. I mean, in every conversation that we

get, there's really two questions. And one is, you know, is it the right time to

sell now? And how long does it take to prepare if I want to sell in a certain

period of time? And so those are the kinds of things that that we get asked.

And every single company is different. But I think where we start that answer is by

asking what they want. Because if they can't get what they want now, then the

answer is pretty clear that they either need to take less or they need to plan on

selling at a later stage and plan on how they're going to achieve the metrics,

they're going to achieve that price that they want, right? And so the right time is

when you as the seller want to get out,

need to get out and the reasons why people want or need to get out are just

different, right? Most of the time it's retirement. Sometimes it's, hey, I want to

go do something else. And then other times it is strategic within a family.

I want to transition to the next generation. And sometimes it is a little bit

different because It is, you know, I'm, you know, my family's moved to Florida and

so I want to follow. And so I'm going to sell my business here and go do

something else in Florida. Yeah, I feel like the easy way to say it is,

is the right time to sell is when your goals can be achieved,

right? I mean, it's, You have to be in tune with what your goals are. You have to

know your goals. And you also have to, I mean, that's why it's so important for

advisors like us to meet with you as a business owner because we can tell you what

could be achieved. And so, I mean, a CPA is always a good person to talk to,

But at the end of the day, you have a goal and can you achieve it?

That's really the right question to ask. And I know that there are many ways to

answer that question, when is the right time to sell? But it really revolves around

your goals. Let's just say that you can and you're comfortable with whatever you get

because you've got enough and, you know, you've got a really good sense of your own

financial position outside of the proceeds. And so the question, the reverse question

can be asked, when is the wrong time to sell? Right? And, and there,

there are, there are discussions around that, but At the end of the day,

you've got a, it's a Rockefeller who was quoted, when he was asked,

"How did you get so wealthy from your businesses?" And he said, "I sold too soon."

Because he sold when the trends were trending up rather than selling when after

there was sort of a peak in the returns in his as he sold when the trends were

moving up. And that's the right time to sell from a standpoint of value.

Yeah. Do most business owners think that way?

No. No, because how many times after we saw some downturns,

it's like, man, this is not worth it. I want to sell. And the financial statements

have negative trends and so the buyer looks at the negative trends and he goes well

I'm going to continue those negative trends or maybe I can do this better but the

reality of it is is banking on you doing it better a buyer doing it better than

somebody who's been doing it for 30 years you better have some really practical

things that you're going to

um, with, with predictable increases in those or turnarounds and those metrics.

And so we just, we just tell people, look, um, sell too soon. You know,

when, when you're met, when your sales are climbing, your net income is growing.

Uh, you're in great shape to sell because the buyer is going to think that he can

continue those trends, do you think so or not? - Yeah, I'm just wondering,

so how do you guys,

how do we advise when somebody gets, the goal is mostly gonna be financial. It's a

financial goal that they have. Maybe they're old age, how do you advise them if

you're like, I don't think they're gonna be able to meet that goal, but the time

to sell, it's probably time to sell based off their age and other factors. Yeah.

I mean, that's what our job is, is to have those hard conversations. We're going to

be as realistic as possible. A lot of your broker kind of people,

they just want to blow smoke at people.

Oh yeah, we can get $100 million for your business and Let me list it,

and they sign a listing agreement or something like that. We try to make sure that

we can meet the seller's expectations. If we can't meet that expectation, we tell

them, and we tell them why. It's not like we list it at a certain amount, because

if we're wrong and we can get more, we're on the same side of the table as that

person, because we get a success fee, So we want more. We'll take the highest

bidder and we'll take it to market and get the most you can get. The problem comes

in, for example, you know, several years ago, we told a client before a downturn in

that particular industry that we could get, you know, several million dollars more

than what we eventually could get because the industry turned down.

There was nothing we could do about it, but at the end of the day, he had to

make a decision whether to sell for that amount, for that lower amount, or hold on

to it, operate it, figure out how to increase his sales, which he did by the way,

and we end up selling that company for a whole lot more than even what he

originally intended. Yeah, that's great. Just thinking about the market conditions that

can impact a decision to sell, what are some of those market conditions that impact

it positively or negatively? Yeah, most people, when they ask that question, they're

talking about market conditions and buyers in the buyers world or the banking world,

interest rates or those kinds of things. And They do impact the availability of a

buyer base some, but if you have a successful business, there's really not going to

be a restriction from a buyer standpoint on the availability of financing no matter

how high the interest rates seem to be. What does affect it is really the industry

that that company serves. In other words, If they're serving their oil and gas

industry, for example, and it's going through a downturn and you don't have a

diverse customer base, then people are going to shy away from that industry.

People sometimes don't like volatile industries like the oil and gas industry, for

example. Some people don't like construction for the same reason. Some people don't

like new home construction, but there's also a group of buyers that focus on those

industries, and they understand the volatility and those kinds of things. So it's

really about the seller's revenue model, and that's where we come in also because of

our business backgrounds. We look at the revenue model, and we decide,

A, who might be interested in it, and B, how can we enhance that or help the

client enhance that revenue model to get the most out of the ups and downs of

those industries? And in that, I mean, you think about the market conditions

affecting the time to sell. If you're a seller, you're thinking, okay,

I'm done with that issue, right? I'm done with that supply chain issue.

I've got this hurdle always and it's a headache. And really, while we can talk

about how market conditions really affect maybe the buyer base or the value,

but really, it can affect a seller and their motivation to sell.

And so you think about, you know, I mean, you think about, yes,

the financial goal and we always revisit that because expectations can change, but

that's what it's about. It is to bring it back to the goal. A lot of our clients,

they're wanting to exit. They're wanting to go to retirement.

A lot of them are saying, "Hey, I'm done with this headache. I've got other

business ventures and I'm just done with this headache." They may take a little bit

of a discount for that, but we've talked with several business owners that they

don't want to deal with some of the things that they have dealt with over the 30

years, because, well, I don't really want to have to go through that again.

I'll tell you, the biggest thing you guys know, because you've been in meetings

where we joked about it with some of our 65 plus business owners that are just

tired of dealing with millennials, and then comes Gen Z,

And they're just going, "I get me out of here, I can't deal with these young

people." And so there's a fatigue that happens, for sure, that drives it.

But while we're on that labor front, we've been very active in the manufacturing

side of things. And so what do our clients always say,

"Man, I can't find skilled labor, right? I can't find the people that are trained

in that, you know, everybody goes on to college and gets these fancy degrees, but

nobody knows the trades anymore. And so it's hard to find people. And so that just

makes people tired. And so those are the kinds of things that certainly drive the

decision to sell. Yeah. So, somebody's ready to sell. What goes into the valuation

and what are some of the key factors that go into what the valuation is?

I think what we always tell people as the market speaks, ultimately, a willing buyer

sets the value. And, you know, the thing is,

is that We know how a willing buyer is calculating the value of the company because

we've been in the market so much.

Most companies are valued, I mean, they're exceptions, but most companies are valued

by the amount of cash flow that a buyer can get out of the investment.

And so what that generally translates as into this crazy sort of formula that is

the accountants version of cash flow generation called EBITDA,

earnings before interest taxes depreciation amortization. And there are some people

that don't like that number, but most of your buyers are going to use a multiple

of that number in order to determine how much they can, how much return they can

get out of the business. And then what Andrew's just talked about,

those variables of existing management, you know,

no concentration of sales, all those different variables, positive trends,

all those

Those are either going to predict a premium or they're going to predict a discount.

And so that calculation is a little bit more scientific than just taking it to

market and figuring out what five people want to pay for the company,

which ultimately is going to have to be the case in order to get the most for the

company. Yeah. And do all those factors, are they all the same factors for each

industry or do they vary by industry? No, they vary. They definitely vary. And I

would say, you know, this is where, okay, so I'm going to take a rabbit trail

here. You know, you guys have heard my soapbox with regards to formal evaluations.

And The financial industry has to get formal valuations.

So P groups will hire these firms of mostly CPAs,

but they have this designation or the specialty designation of a certified valuation

expert or whatever they call themselves. And so, you know, they go through a lot of

research, a lot of metrics, and they come up with a value.

And sometimes, as you guys have heard me opine a bunch about, sometimes they come

up with a value, I think Mason, was it you yesterday that came up with a value of

a company? And I'm like, there's just no shot, right? There's no way we would be

able to get that amount for that company that you described yesterday.

You know, maybe, I don't know, maybe the doors in the office were gold or

something. I don't know. But the cash flow didn't yield anywhere near the kind of

return that somebody would need to have in order to pay that kind of price for

that company. And so, you So that was a formal valuation done by somebody you

probably smarter than the three of us put together. But at the end of the day,

it's not reality.

And I know you need to have those guys to do those valuations, but ultimately the

market is going to speak. Yeah, that's great. So just thinking, we've probably got

business owners out there that are listening to this and maybe one of them is

thinking, I want to sell that sells on the horizon. What are what are some things

they can do today that will hand will help them enhance the value of their company

and just be transaction ready?

That's about the business health check as well. So yeah, and and yeah, that's

exactly right. I mean at the end of the day, I mean, you plans,

plans, plans will fail in isolation, right? But they will succeed in with an

abundance of counselors. And so, I know I butchered that proverb, but that's

essentially what we're talking about, right? I mean, that's the reason why we exist

is because we want to advise so that plans can succeed.

And so, And so, we're not the only advisor, and we know that business owners do

have trusted advisors already, CPAs, attorneys, and even those advisors,

they're good to talk with. They also know people that will know a little bit more

about not just valuation, but what the market's doing, "Hey, maybe what you can

achieve." But that's why we sit down with anybody because we'll tell them.

And so, I mean, we stick long -term, we've mentioned this before, we've stuck long

-term with clients and we are patient because we want them to achieve their

Or, you know, sit down with advisors that will focus on your goal and achieving it.

Because that is the most important. That's the first step. Sit down with them.

That's why we always say, "Come sit at our table." Yeah. I'm going to add,

I'm going to just go to the negative side of that, right? And so, there are always

reasons why

And, and, and the, the most common reason is because the business owner can't get

over, they can't come up with the answer to a question they have.

And that can be, hey, what's going to happen to my kids that are in the business?

What happens with the kids that are not in my business when they are kids in the

business? What happens with, you know, with this asset,

you know, the facility that I want to keep, you know. And without getting advice

outside, they can't answer the question, and so they just get frustrated and they

don't do anything. And I would tell you that some of the most tragic situations

have been where families own a business and they haven't made any transition to the

kids ownership -wise

and the parents just don't deal with it. They don't sell the business,

they don't create a plan because they just don't know the answers. And so all I

got to tell you is that we never charge for that meeting, for that first meeting.

And we can identify, we can probably clear up a lot of those questions in one sit

down at our table. It doesn't cost you anything. We don't bill hourly, like the

CPAs and attorneys do that work in this industry. And I'm not bad -mouthing.

That's because we don't want to bill you for a few hours. We want to bill you for

making the transition happen. And And so, come sit at our table,

we'll answer those questions. If we haven't seen it, and look, there's always things

that come up, we go, "Oh my gosh, we can't make that one up." But we've seen a

lot over a ton of years of doing this, owning our own business, understanding

exactly the emotions and all that kind of stuff that other people go through as

well as we've been through. And we've got answers to get around some of those

obstacles. So don't make that mistake, right? Get your questions answered and at

least make a positive decision whether you're going to sell what you're going to

want when you sell, how you're going to make that calculation. And let's sit down

and handle business. - Yeah, I think that leads into my final question of just when

is the right time to bring in an advisor and an intermediary, and when do most

business owners contact you?

- Yeah, too late. You know, I think I've had three this week where they already

have, you know, a transaction kind of ready to go and one was horribly structured

and he doesn't know how to get out of it. And so I would just say, you know,

it's mostly too late when people ask to questions.

So just sit down with us. We're not going to pressure you to do a transaction that

is not going to accomplish what you want. That's a waste of our time, especially if

we're only getting a success fee. So don't wait. It's ultimately never too late

until you sign the purchase document or the sale document. And we've been called in

to clean some things up in the past. But you know, do it right and let us help

you walk through the transaction to accomplish the goals. Yeah.

Andrew, do you have anything? No, I mean, that's, that's really, it's really it

because I mean, at the end of the day, we, the earlier, the better. I mean, the

earlier, the earlier that we can get access to the company,

the better it is because we know the company. We know the challenges that they're

going to face. If we're brought in, okay, I'm ready to sell tomorrow.

Okay, well, that's great, but we have to still understand the challenges that will

come up against when it's day before closing. Those things,

and So we have to plan accordingly so that earlier the better. And Mason, you know

that we got a meeting with a client in a couple of weeks that came to us over a

year ago and said, "Okay, if I want to sell for this much and yield this much in

my bank account because he knew his debt and he at guesstimating his taxes. I want

to sell for this much. And we said, "Okay, you know,

you're going to need to look like this. You know, your company needs to look like

this in order to expect that amount." And guess what? In two weeks,

we're going to sit down with this guy and he's made his company look just like

that and we're going to be able to take it to market and accomplish what he wanted

and so that was over a year ago and so you know I know that we are M &A advisors

but that's the reason why we put together this you know health checkup basically of

your business because we're going to take a look at it and and with the eyes of

an M &A advisor and kind of help you understand what your company is gonna need to

look like if you want to achieve some sort of goal and certainly can work with you

in trying to figure out what that goal needs to be if you're unreasonable.

- Yeah, absolutely.

Well, that's all we have for today, appreciate you tuning in and if you're

interested in learning more about the business health check or interested in having

conversations about selling just please give us a call. We'd love to be a resource

for you.

And that wraps up another episode of Integrated Insights with ICCG. Be sure to

subscribe and stay tuned for more stories from our team. We love hearing from our

listeners. If you have any questions or topics you'd like us to cover please send

us an email in the show notes. For more information about ICCG please check us out

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a seat at our table.