When it is a good time
A company can be sold at any time, but proper timing increases the likelihood of a successful transaction and ensures a higher price for the owners. Successful sales transactions are concluded when the timing is right both in terms of the external environment and the development stage of the company.
Sell your company during a period of economic growth
Generally, the best sales transactions take place during periods of economic growth, when companies are in the mood for expansion and look for new markets, customers, products and production capacities. During the periods of rapid business growth, the management feels the pressure to boost performance, also by taking over other market participants – especially towards the end of the growth cycle, when opportunities for organic growth are exhausted, while there are still no marks of downturn coming.
Further growth potential has a significant impact on the company’s value, which depends on the cash flows to be generated by the company in the future. Determining the value involves forecasting, and forecasts have always some hockey-stick element involved in times of a bull market. This is due to both psychological reasons and the shortcomings of analytical tools.
In addition to the business-driven motivation to make an acquisition, the buyer must also have financial resources, i.e. enough capital to complete the transaction. Once again, the period of economic growth provides the best opportunities for financing transactions, especially before the end of the growth cycle. This is the time when companies’ bank accounts are full of cash as well as,banks’ balance sheets are in good shape, enabling them to lend money. In addition, the capital market investors, who are also usual financiers in such transactions are looking for lucrative returns.
In addition to favourable economic conditions, the readiness of the company must be taken into account when choosing the right moment for the sale.
The most favourable time is to sell a company when the rapid growth phase within the industry itself is over and the market is maturing. Unless your company is a start-up firm, buyers would not be motivated to pay for the future growth potential, they would rather base their offer on the existing state the company is in. In such situation it might be wise to wait with the divestment. On the other hand, if the industry is really “hot” in the eyes of investors, and buyers’ growth expectations go through the roof, impacting also the valuations, it may be reasonable to sell the company before the optimism cools down.
The company’s own business plan and the current state of its implementation have a significant effect on the value to be realized from the divestment. A company that recently entered a new market or launched a new product must be able to prove to the potential buyer that the chosen direction is correct. The implementation of the business plan does not have to be 100% completed by that time. On the contrary – the buyer is happy to buy some growth potential, but the first results should be visible. This reduces the risk for the buyer, and lower risk usually means higher price.
From the point of view of timing, it is also important for the buyer that the investments made by the company earlier are converted into financial performance. Offers for a company that has spent a large amount of money on building a new plant that is still underutilized are generally not too good.