How to Know When It’s Time to Sell

Nov 23, 2010

About a year ago (Performance Business, Aug. 2009), we explored why a performance retailer would buy a business. We covered various scenarios, including expanding your geographic area, eliminating a competitor, gaining market share, reducing costs and increasing profits, acquiring a valuable supplier and gaining coveted real estate locations.

In this article we will explore some of the compelling reasons why you might consider selling your business. Even if selling has been the last thing on your mind, read on-you might be surprised how this information could change the way you think about selling, now or in the future.

By employing Intelligent Strategy, which we define as the capacity to plan, reason, think creatively and help you realize tangible value, you may find that selling is the answer to your long- and/or short-term challenges. Intelligent Strategy allows you to not only determine whether selling is the right path for your business, but will also give you the objectivity to determine if you are fit to pursue this course of action.

Three Reasons You Might Sell

Here are three reasons you might want to consider selling your business, now or in the future:

Reason 1: Changing Market or Financial Climate

One day you are meeting or exceeding quotas, and soon thereafter you notice that product sales have started to drop off. What’s going on? It is probably due to one of two factors: changing product trends or a drop in consumer spending.

Changing End-Product Trends. Let’s say you run a retail performance parts store, and the consumer trend has shifted away from large pickups to hybrids or electric vehicles. This is likely to have a negative long-term impact on your revenue, unless you can move with the trend. What is the writing on the wall in regard to consumer trends? Is there a new technology that could greatly affect the demand for your product(s)? Would a change in your product mix help you weather the change? If so, is your company flexible enough to respond quickly? If not, selling may be the best option.

Reduced Consumer Spending. Soft sales across your segment spell bad news, whether you want to hold on to your company or sell it. But if unemployment in your area is making it difficult to keep your revenue at threshold levels, a stronger emphasis on online (i.e., non-geographically dependent) sales might allow your company to weather the temporary storm.

Eroding Market Share. Businesses that are retaining or growing their market share demonstrate that they are meeting consumer demand.  If your company is persistently losing market share, you must take note that something serious needs to be addressed before you’re crowded out by competitors that have captured the attention and loyalty of your customer base. Is it possible to regain traffic at your store with a change in marketing, distribution, product mix or new merchandising design?  Or is it time to sell out to companies with deeper pockets and wider mass appeal?

Reason 2: Problems Within Your Business

Sometimes, it’s internal factors that signal the beginning of the end.

A Souring Partnership. Businesses are based on trust. If even one partner is not carrying his or her weight, that erodes confidence. This could be a lack of financial support, a failure to devote adequate time to developing or supporting the business, or creating ethical or legal problems. In this case, the relationship may be easier to end than to mend; the decision to sell and either enter into a new enterprise or move on to a new career may be the healthier choice.

Negative Cash Flow. There are many factors that can adversely impact a company’s cash flow, from slow sales to increased overhead to insufficient margins to unanticipated capital investments or expenses. Some businesses have lines of credit in place that allow them to use cash flow to cover expenses when profits are high, with financing kicking in to provide a cushion during a downturn. But if interest rates no longer make that economically feasible, or your bank does not see you as a good credit risk, your cash drought could create problems that make selling a smart decision.

Reason 3: Personal Conditions

And finally, it can be factors in one’s personal life that prompt a serious career change.

Age or Health of the Owner. If the primary owner/operator of a family-run business begins to have health issues, or has reached an age that makes day-to-day operations more difficult and less enjoyable, a decision to sell will depend heavily on whether someone is available to take over the reins. Is there a family member with the desire and ability to keep the business competitive and help it grow? If not, it might be best to sell the business and share the proceeds through an inheritance.

D-I-V-O-R-C-E. When a couple owns a business and divorce is looming, the effect on morale and operations can be devastating. This is a good time to re-evaluate your focus on running your store, with an eye to selling it. Is this something you want to do for the rest of your life? If so, it might make sense to move to a new location and reopen under a new name. If the business no longer holds its appeal, however, it may be the ideal time to clean the slate for a new career.

What to Do Next

Once the decision is made, you need to do everything you can to ensure the company doesn’t lose value or fail before closing. The short list of considerations includes:

  • Maximizing the value of the “deal.” To do this, you need to determine the metrics that a buyer cares about (i.e. EBITDA, loan-to-debt ratio, inventory turns, etc.), and have a strategy to bring these metrics in line with expectations, improving the multiples and value.
  • Preparing your business to sell, assuring that all legal paperwork and financial documentation is in order.
  • Establishing boundaries on matters such as employment agreements, payment terms, non-competes and compensating key people.
  • Deciding whether to keep the pending transaction a secret from staff, competitors and/or customers.
  • Resolving whether to go it alone, or hire a specialist who can help assure you don’t get blindsided by issues that a buyer can use to leverage a lower price to help you sell the business.
  • Minimizing tax consequences.
  • Liquidating remaining inventory or assets after the sale is complete.

Meanwhile, you need to handle all the work that needs to be done and still run a profitable business.

Addressing these issues early on is often what creates real value at the later stages of the process of selling your business. Without defining an Intelligent Strategy at the outset, business people often find themselves failing to plan adequately, and failing to achieve a satisfactory conclusion.