When is the right time to sell your business?

(Part I)

I know running a small business can be all-consuming. Your employees get time off, but, if you’re like most business owners, you’re thinking of your little dream catcher almost every waking minute and quite a few sleeping minutes too. But, sometimes, we get so caught up in the day-to-day issues that we neglect important strategic questions that will ultimately determine our long-term success. One of the most critical issues for any financial asset, including your business, is deciding if and when you should sell. I would never claim to be an expert in your business niche and I equally understand there are many nonfinancial rewards to owning a business. But many of the same principles that apply to investing in the stock market also apply to private businesses. After all, common stock represents an ownership interest in a business. 

The financial objective of any for-profit business should be earning a higher return on your capital, knowledge, and hard work than you would working for someone else or investing elsewhere. There are two conditions that could lead to you receiving that less-than-optimal return. Buyers could be offering to buy your company for more than what it is currently worth, or the value of your business is only in your real estate, machinery, and inventory, rather than your future cash flow. Both of those scenarios are simply different flavors of earning a lower return on your capital and time than you could while doing something else; for example, selling the business, investing the proceeds towards steady income and then vacationing with the grandkids.

There could be any number of reasons why buyers are offering you very high prices. They could already be in the business and want more economies of scale or more freedom to raise prices. But there are also fads that seem to take over private equity, too. Just like the stock market, private business sectors go through investment bubbles. I hear, at least anecdotal, there’s a boom right now in carwash construction. It’s easy to understand the appeal of owning a carwash: New ones are highly automated and they provide easily measured and monitored daily cash flow. But the more carwash locations in a neighborhood, the less of a market share there is for each to capture. If private equity wants to throw bales of money beyond reason at your business, well, maybe you should let them have at it.

The other scenario of your business’ value only consisting of property, plant and inventory might, of course, although frustrating, might simply be a reflection of changing demographics or zoning, making your property more valuable. If there are temporary and manageable business conditions leading to a lower-than-desirable return, you will know best whether that is worth fixing. If it’s a more-permanent state of affairs, then maybe it’s worth redeploying your capital.

In my next column, I’ll go into more detail about determining what sort of target return you might want to set for your business. Many industries rely on capitalization rates or variations on them, but I’ll discuss a few more sophisticated wrinkles to introduce to your next back-of-the-napkin business valuation.

Evan R. Guido is a Parrish, Fla., resident and President / CEO of AKSALA WEALTH ADVISORS. Call 941-500-5122 or visit www.aksala.com, for more information. Email: eguido@aksalawealth.com.