Sometimes the owner of a business has no choice but to sell a thriving enterprise, such as in a divorce, the splitting of a partnership or the death of a major shareholder.
But timing is key when it comes to getting the best price for a company, and depending on how well a business is performing, a good time could be right now, according to investment banker Fred Rock, who helps clients buy and sell companies.
“The best time to sell your business is when your business is doing well, the prospects for your business to do well are easily explainable and there’s a perception that the economy in general is going to do well, said Rock, managing director of Focus Investment Banking, a Washington, D.C.-based firm.
“When you put all those things together, you can get the best sale price for your business in that kind of environment,” he said. “For example, if your business is doing well, but the economy isn’t doing well, you’re not going to really get as good a price because buyers look at the economy. They’ll wonder how long you will keep doing well if the economy stays bad.”
With an estimated 76 million baby boomers in the pipeline turning 65 at a rate of 10,000 per day for the next 15 years, according to Pew Research Center, many businesses owned by people in their 60s will be changing hands. The 2011 U.S. Census reported there were 7.4 million small businesses in the country providing jobs for 113 million workers.
The choices for business owners nearing retirement often boil down to passing the businesses to heirs or selling the company for retirement income.
A robust economic outlook does more than boost the price of a business; lenders also are more inclined to provide money for business purchases when the economic outlook is bright.
The Dow Jones industrial average and the S&P 500 are trading at or near all-time highs, bolstered by improving U.S. jobs reports. The bull market for stocks is in its sixth year and with interest rates still hovering near all-time lows, cheap money has been greasing the wheels of business growth.
“You’ve got good profit numbers right now,” said Adam Yofan, president of Alpern Wealth Management. “A lot of S&P 500 companies have beaten their own earnings estimates. The average return for the stock market over the last five years has been in the high teens – close to 20 percent – whereas the long-term average return has been in the high single digits.”
Ray Vargo, director of the University of Pittsburgh’s Small Business Development Center, said he would equate selling a business to selling a home, both of which stand a better chance of fetching a higher price in a strong economy.
And like selling a home, business owners must prepare a company for sale.
“Could you get the highest price for a company when times are good? Absolutely,” Vargo said. “But you’ve got to make sure you are preparing your business for sale.
“You’ve got to make sure it’s not just one person doing everything. Make sure the business can run with a new owner. A potential buyer wants to see all these systems are in place. That makes it more enticing to potential buyers of a business.”
But economies and markets run in cycles, Rock said.
He said between the year 2000 and now there have been two downturns in the economy. It is not unlikely that over the next two to six years there could be another economic downturn. Business owners who wait for the next downturn could find it more difficult to sell at the price they could get now.
Business owners who plan to pass a company to their children also have to consider timing and finances. Rock said he worked with a father who left his business to two sons who were not great businessmen. Within five years of the father’s death, the businesses was bankrupt, whereas it could have sold it for several million dollars just five years before.