When is it the right time to sell ?

There are three major factors when trying to answer the question of timing—Business Fundamentals, Market Conditions, and Product Lifecycle.

Business Fundamentals: The best time has nothing to do with when you are ready to sell, but rather the prevailing market conditions and current trends in your business. Clearly, you want to maximize shareholder value which means sales and profitability should be trending up as opposed to flat or declining performance.

Market Conditions: There are a number of fiscal indicators that are major drivers. First is obviously a favorable economic climate and stock market condition that increases investor confidence and a companies’ appetite to use acquisitions as a vehicle to drive higher growth and earnings.

Second is the level of M&A activity in your market sector. You will definitely want to be in on the leading edge, rather than the trailing edge of deal making; once the leaders in your sector have made acquisitions to fill a need, there will be fewer firms looking at deals, and the ones left tend to be followers and will likely pay a lot less than top tier vendors.

Another leading indicator is the level of private equity firms either investing significant funds in privately-held mid-sized firms, or actively acquiring public companies and taking them private.

Lastly, you have been approached—indicating that there may be others buyers unknown to you that see equal or greater value in your business.

Product Lifecycle: When you sell is also strongly influenced by your value to buyers and where you are with respect to market acceptance. By that I am talking about market adoption of your technology–early adopters, early majority, late majority and laggards.

The value of companies with disruptive technology has less to do with past financial performance and more to do with being first to market, new competitive advantages and raising the barrier to entry. Values for these technology driven companies are based more on a multiple of R&D investments than past sales that could easily be 15-25 times R&D expenditures.

Once you gain brand name recognition and wide customer acceptance, you are more attractive to buyers because of your customer base and cross-selling opportunities. Revenues, profits and annual growth rates become the standard to measure value with multiples of 2-3 times trailing 12-month sales more the norm.

As your market segment matures, you become an acquisition target because of financial contributions—cost reductions and earnings improvements become the most important elements to something I characterize as ‘financial engineering.’

Timing is Everything: It always takes longer than you expect; however you can directly influence the outcome by remembering that:
No buyer wants to acquire a troubled business—they want a business with momentum.
To capitalize on strong market conditions you need to be aware, prepared, and proactive.
Your value proposition to buyers changes over time…from technology, to market penetration to earnings contributions.