“Sell By” Date

When Should You Sell Your Company? This question would seem to have a wide range of potential answers, but the fact is that there is only one correct time to sell your business. In fact, there is only one correct time to sell any business.

Ask an owner when he or she plans to sell the company and you’re likely to receive an answer along these lines:

• When the kids get out of school, get married, move out, are established
• When I’m 60, 62, 65, 72, 93½….
• When our sales reach $50 million, $100 million, $1 billion…
• When I’ve put away enough to retire, buy a yacht, travel, get a divorce…

All of these answers are tied to some future milestone for the person or the company, but none of them identifies the right time for a sale. The right time to sell a business will almost never coincide with graduation day or a birthday or any other lifecycle event. In fact, these target dates are completely unrelated to the best time to sell a business.

So when is the best time to sell? Ideally, it is the first time that proceeds of the sale will yield the financial and personal returns that will sustain the seller through the next chapter(s) of his or her life.

The right time could come while the kids are in kindergarten or the owner is 43; or, the best time might not come until five years after the owner has ceded day-to-day control of the business to a scion or manager. The best time to sell is determined by the values—financial and personal—that the sale will yield.

Let’s break down the timing question into its core components: financial and personal.

First, the cash generated by the sale must be enough to sustain the seller’s intended lifestyle. The specific dollar amount will vary by lifestyle, age of the seller and other factors. Whatever the specifics, though, there will be a number that covers the owner’s financial needs moving forward. The owner might look for a lump sum that throws off enough annual returns to pay all living expenses, a consulting relationship that generates annual fees, a sum that will be drawn down to zero at a certain age or some other target.

Beyond the cash generated by the sale, the transaction should help provide the personal benefits that the owner needs to ensure a satisfying life. For some owners, this will mean continued engagement with the company through consulting arrangements, directorship or an operating role. For other owners, the personal benefits might include a guarantee that the company will continue to operate under the family name or a continuing role for other family members.

The best time to sell a company is when both of these targets are met. Not before. Not after. Exactly when it happens.

The last point is likely to generate some debate. Once the targets are met, some might argue, the owner has an opportunity to increase his returns further. If the magic number if $10 million and the company reaches that value, what owner would be foolish enough to stop at that point rather than building the value to $11 million, or $15 million…or more?

Certainly, we can all point to friends and peers who blew past their magic number and continued to gain returns for many years beyond the time that our recommended approach would flash a sell signal. Why would any owner simply stop building the business and cash out when the opportunities are so great to build further.

There is one key number that answers this question: 2008.

Remember 2008? That was the year when tens of thousands of business owners were sent back to Go without collecting $200. That was the year when tens of thousands of business owners were forced to postpone their business sales by five, seven, ten or more years. For many, the calamity of 2008 meant that these owners would never again have any prospect of reaching their magic number.

It’s not likely we’ll see a repeat of 2008 in our lifetimes, but the risk of an industry downturn or other setback is still very large and very real for most companies. Once a company gets to the magic number, the opportunity to lose ground is just as real as the potential for further improvement. The belief that the company can continue building on its gains without a hiccup is exactly the mindset that makes it impossible for most gamblers to leave the table when they are winning.

Few owners identify the magic number or the core personal returns that will trigger a sale. Fewer still take proactive steps to achieve those targets. Even fewer will have the discipline to pull the trigger when the moment arrives. At the country club, we’ll hear from the people who stayed in the game and continued to prosper. The ones who stayed too long and failed? They can’t afford the country club dues anymore and, anyway, they don’t like to talk about it.

Economic cycles rise and fall, as do investment trends. The best time to sell will come when it comes. It’s up to each owner to know what to look for and respond appropriately when the time is right.

Louis Pasteur advised that fortune favors the prepared mind. He was talking about science, but his advice is equally priceless for business owners.