There are many factors that determine best timing for selling a small business -- the financial condition of the company, valuation, growth cycle, profit history, and the current market.
Usually the best time to obtain the highest price occurs when sales and earnings are good and trending upward. A solid earnings trend will enable a buyer to pay a higher price and still meet his return of investment criteria. A history of good performance also gives the buyer confidence in projected future earnings.
Value is dynamic and proper timing makes a big difference in the prices paid for business acquisitions. External factors such as the economy, industry trends, competition, stock market volatility, investor confidence, interest rates, and geopolitical considerations are cycles of constant change that impact value.
Internal conditions within a company also change. Often in combination with external factors, sometimes independent of those factors. Changes do, and will, occur and they always tend to impact business value -- sometimes eroding value and sometimes increasing value.
So how should you start thinking objectively about the best time to sell?
A good visual of right-timing would be to imagine the life cycle of your business plotted as a bell curve with the peak being the top of the growth cycle. The top is when you have reached the flat plane of growth...a sustaining mode. Buyers pay the best prices when they can't see the top, when the curve is still climbing upward. Once the top is visibly breached, buyers may pass on the opportunity or may pay prices based on a downward trend and a higher risk factor. If you wait until your revenues are already sliding over to the downside of the bell curve, you have waited too long. Your business has already started to retire before you have. To get the best deal you have to sell on the way up.
Markets change and fortunes change from year to year. The current status of the small business market place in Florida is one of the best in the nation and policies are in place for continued prosperity and growth in the State. Buyers in every category are looking for alternatives to traditional investment avenues. They are looking for stability, better predictability and control. Business acquisitions offer all of these and can also offer a better return on investment than other investment opportunities.
The capital gains tax rate is presently at historic lows at 15%. However, this rate will increase, possibly by as much as 69%, effective January 1, 2011. To take advantage of the 15% capital gains tax rate, an owner who is considering selling the business, should do so by December 31, 2010. Congress is planning to put a 5.4% surtax on incomes above $500,000 for individuals and $1 million for joint filers to fund health care reform. which will affect both capital gains and dividends. If passed, the surtax goes into effect January 1, 2011, the same day the Bush tax rates of 2001 and 2003 are set to expire. The current federal capital gains tax rate of 15% would rise to at least 20% -- 25.4% with the surtax. This represents a 69% increase overnight. This does not include any changes that might come from increases in state and local tax rates.
Most importantly, even in current economic conditions, buyers exceed sellers and we have a robust exit market for now. The time will come when the flood of baby-boomer business owners ready to sell will outweigh the ready buyers.
Fueling the market are the different categories of buyers looking to put their money to work by acquiring profitable businesses in areas with a promising economic outlook:
- Early baby-boomer corporate retirees
- Corporate and management-level refugees who have suffered a downsize who are typically baby-boomer age, have severance pay or 401Ks to invest, and are looking to go into business for themselves. The stock market, or putting money in the bank, do not look attractive to these corporate refugees at this time in their lives
- Foreign buyers seeing U.S. businesses as investment opportunities while the dollar is valued lower against their own currency
- 30-something up-and-comers aggressively buying and building
- Strategic Buyers, both public and privately-held companies, are actively acquiring smaller firms as part of their strategy for quick growth and innovation (Merrill Datasite - Dec 2009)
- Investment Buyers, such as private equity groups, "are going down-market" (Merrill Datasite - Dec 2009) and are seeking add-on acquisitions in the lower middle-market for their investment portfolios
- Blue collar workers who have been layed off are also looking to "buy a job."