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How do I capitalize on business trends leading up to a sale?

What story does the business trend tell about your company?

Capitalize on the Trends

Posted by David Humphrey on 14 September 2016 | Comments

Trends tell a story, not necessarily the whole story, but they do convey a very strong message to buyers. Five-year trends in revenue and profits are especially important and should be carefully managed to the extent possible in the years leading up to a sale.   All businesses go through cycles – sometimes these cycles are driven by forces of nature (a snowy winter / a warm winter), the national or regional economy (improving / in recession) or company specific events (gain or loss of a specific customer). 

A business with positive trends is more desirable to buyers than one with static or negative trends.  Buyers are unsure of what to make of erratic (some years up and some years down) revenues and profits.  Peaks and valleys make trends more difficult to seem which creates fear.  The best time to sell is when a business has experienced several years of growth.  Buyers of closely held businesses are very similar to Wall Street investors, primarily because that is where many of them were trained.  They are willing to pay more for a business with positive trends versus one with negative or stagnant history.  A graph of historical results going up and to the right eases their fear of the unknown future and suggests the business has a greater likelihood that it will continue to improve after they buy it.  

Business owners often plan to sell based on a predetermined retirement date, rather than managing to a positive trend line and peak valuation.  A business’ optimum value may likely occur several years before retirement, when the owner is still active, focused and driving operational results, rather than what the industry calls "retired in place."

Retired in place owners are owners who continue to own the business, show up to work each day but no longer have the drive to be a visionary, invest in new equipment or implement changes to remain an industry leader. They no longer see an opportunity for a return on investment given their shorter time horizon.

Regardless of what is occurring at the business, there is the national and regional economy to consider. The economy might be firing on all cylinders when the owner is 68 years old but could slow by the time the owner is 72 and nearing the targeted retirement age. Missing the zenith of the business’ trends may cost the owner significant value or cause delays in realizing retirement. Sadly, we know many business owners, who managed their business well, missed their opportunity to sell at peak value in 1999 or 2000 and others in 2007 or 2008 as they chose to hold off until they were just a little bit older. Instead, five years later they were still operating the business and wishing they could sell for the values they were offered years earlier.

For owners whose business value peaks before they are ready to retire, consider this: many investors would prefer to buy a business where you are willing to commit to sticking around and assist the management team for a couple of years. They have less risk making a management mistake or transition misstep and you receive your premium value and several years of a consulting paycheck as you ease into retirement as planned.

If you are interested in learning other ways to increase the value of your business, The Art Of Business Value Enhancement is a Must-Read!  Click here for more information.