Michael B. Ribet, Managing Director, Trans@ctive Partner
While the timing of the sale of your business involves many factors, one thing is very clear. The best time to sell your business is when you don’t have to. Desperation, whether driven by cash needs or other factors, invariably becomes apparent to buyers who will either drive the price down or back out.
When the business is growing, few CEO’s think about selling. CEO’s are by nature positive thinkers who are expected to see the bright future and communicate that vision to others. On the other hand, business growth is non-linear. There are inflection points where growing to the next stage will involve risk, time and capital investment. These inflection points are the best times to evaluate the market and consider selling the company.
For example, Jane owns 100% of her business. Jane hasn’t looked into what a buyer would pay for her business because it’s exciting to think about growing the business to the next stage. She doesn’t know it, but Dreamco would buy the company today for $6M. Jane decides she needs $4M to grow the business. She raises venture capital at a pre-money valuation of $8M. The VC deal provides that in the event of a sale, the investors will get their money out first and the remainder will be divided pro-rata (a pretty typical condition of VC investments.) If she sells for $6M to Dreamco the investors will get $4.66M and she will get $1.33M. Before Jane can receive $6M for her share of the business, the sale price would have to be $13M. Now Jane must try to double revenues, hope market conditions don’t change and that she can find a suitable buyer before she can achieve what she could have before taking in the investment.