Finding the “sweet spot”: why timing is crucial for a successful transaction?
Question
Finding the “sweet spot”: why timing is crucial for a successful transaction?
For entrepreneurs looking to sell their business, obtaining the highest possible valuation for the company is paramount.
However, predicting the amount of interest and the valuation the business will generate is notoriously tricky for company owner-managers. That’s because the valuations of buyers are based on a myriad of factors, not least of which is the timing for a transaction.
A transaction which is carried out at the most opportune time can positively impact both the valuation of the business and the response it generates in the market. Thus, a key challenge for owner-managers is understanding the factors underlying buyer valuations and fundamentally grasping what constitutes “right” in terms of timing.
For our purposes, we can divide this into three broad categories: the right timing for the entrepreneur and their team, the right timing for the financial health of the business, and the right timing for the wider market.
An entrepreneur able to sell their business in the sweet spot of all three will be much more likely to achieve the high valuation they seek. Let’s take a closer look at what these three timing categories mean individually.
The right time for the business.
According to investment dictionary Investopedia, in the valuation process, the worth of your company is determined via the application of established methods, taking into consideration the business’ management, the composition of its capital structure, the prospect of future earnings and the market value of its assets, among other metrics.
While valuations are also increasingly based on future prospects and beliefs surrounding the company’s potential for the longer term, the past performance and financial dynamics of the company are closely scrutinised. While recent years will be of interest to potential buyers, it’s usually the preceding 12 months which will be examined most closely. Unsurprisingly, a business which has been running smoothly during this time, showing strong turnover and profit, is more likely to generate a high valuation.
It’s less advisable to sell your business during a temporary drop in turnover or profit. If, for example, the business has recently spent big on technology or in the hiring of new staff and has yet to see the return on investment, most entrepreneurs would hold off selling until those investments were actualised.
During the Covid pandemic it was commonplace to see a temporary drop in key financial metrics, and in many cases, a return to pre-Covid levels or sometimes even stronger performance as businesses emerged the other side. Businesses continued to change hands through late 2020 and in 2021 as an adjustment to “normalise” trading profits for the impact of Covid was accepted across the business world. This principle of “normalising” can be applied to other one-off or exceptional circumstances, although it is a subjective area where an adviser is best placed to help.
Having a clear view of your objectives and long-term goals as an entrepreneur, as well as a firm idea of what any other owners in the business would like to achieve as part of a deal is vital, as this will have a significant bearing on the timing of the sale.
The right time for the entrepreneur and their team.
Having a clear view of your objectives and long-term goals as an entrepreneur, as well as a firm idea of what any other owners in the business would like to achieve as part of a deal is vital, as this will have a significant bearing on the timing of the sale. Most buyers will want to protect business momentum by keeping management in leadership positions, at least initially, and are likely to build incentives into the deal to encourage leadership to stay committed to the company.
If the entrepreneur is planning to exit the business (for retirement, for example), it’s important to pass responsibilities on to key people as part of your preparation process, identifying the core management team in position to carry the business on, and identify any skills gaps which may need to be filled.
Potential buyers will perceive management instability as a significant risk and probable expenditure (since recruiting new management can be costly and time-consuming); this risk is likely to have a negative impact on valuation.
The right time for the market.
For both buyers and sellers, a successful deal on price is a primary goal. However, external factors outside the owner-managers’ control can significantly impact a business’ valuation. These can include the wider economy, market volatility, consumer demand, how the sector in which the company operates is evolving, and more. If a certain sector is facing upheaval or a large technological shift, potential buyers are likewise apt to see this as a risk to be factored into their valuations.
It’s important to keep abreast of the current state of the market for company transactions, keeping an eye on demand for deals and investors’ willingness to take on new projects. Recently, many experts in private equity have pointed to the robustness of today’s fundraising markets, citing deal-making at record levels and vast amounts of unspent capital ready to be deployed. A professional adviser can work with you to keep you informed on these developments and other trends impacting investors and the wider company transactions market.
Although the ideal conditions for a company sale are found in the sweet spot – where the right timing for the business coincides with that of the management and the markets – in the case that one of these parameters is not in alignment, it certainly isn’t “game over” for sellers. Engaging an expert adviser to work by your side to prepare your business for sale, connect you with potential buyers and to assess the strength of incoming bids can also help to maximise its outcome, even amidst adverse conditions.
Find the right timing for selling.
Many entrepreneurs approach the sale of a business with a deadline already in mind. However, careful selection of the ideal time frame is important to ensure the best possible deal and a smooth transaction.
Most UK corporate finance advisers agree that selling a business usually takes around six to nine months. However, sellers should anticipate a post-sale period in which as owner/manager they remain in the company for a length of time; this could be anywhere from a few months to a year or more.
Owner-managers who wish to leave the business quickly, for example if they want to turn their focus to their family or pursue other projects, should prepare for this by strengthening the business’ management team and passing responsibilities onto them as part of their pre-transaction preparations.
Authored by.
Based in the Midlands, I am a founding member of Clearwater International since 2003. My background includes working for BDO Corporate Finance and in the Specialised Finance arm of NatWest Group prior to that, giving me over 25 years of experience in the corporate finance industry.
As a Partner in the Clearwater International Industrials & Chemicals sector team I have advised clients on c.60 deals. Having the opportunity to work with interesting people and businesses across a range of sub-sectors, with a focus on the client at the heart of everything we do is what makes the job exciting. There is nothing more satisfying than helping a business owner through the challenges and rigours of a transaction on a day-to-day basis and then delivering the most successful outcome for them.
What first attracted me to Clearwater International was a solution-driven, adaptable approach to delivering corporate finance services to growing entrepreneurial businesses. That remains at the forefront of the business today and is the key driver of establishing the dedicated Clearwater Growth team, which I am very pleased to be a part of.
Outside of work I remain a keen sportsman and am proud to play Masters hockey for England.
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