Timing a business sale

While these may be tricky times for business, it’s not necessarily the wrong time to sell. “You have to accept the reality of the marketplace,” says Stephen Marshall, managing partner at EdgeStone Capital Partners.

Turbulent markets can make it hard to predict what’ll happen when a business goes up for sale. “When the outcome is less certain for management, this is very disruptive to business,” says Marshall. “It’s important to really prepare management, co-investors and other shareholders and work through the different scenarios.”

For starters, the sale process can expose confidential information to the marketplace and create competitive challenges. Secondly, if managers are on a traditional incentive program, it may be unclear how the sale will benefit them.

Counsel from an investment bank will be invaluable. “From the outset, any good investment bank will be able to give a fairly good indication of what they think the likely price outcome will be,” says Andrew Federer, vice-chair of RBC Capital Markets.

He cites an example where a key buyer may appear early in the process, prepared to pay the highest price. “We’ll often structure a process around [the potential buyer] at the outset to keep them involved,” says Federer. Keeping one buyer on the hook, though, is also an important tool to spread buzz among other buyers and create some bidding tension in the marketplace.

In some industries, finding the right buyer can be relatively simple and won’t require the services of an investment bank. In the case of high-tech, cutting edge businesses, for example, there are only a small number of potential purchasing companies.

Amar Varma, former managing partner of Extreme Venture Partners, tends not to engage banking advisors, but says lawyers are a must. “Really big companies often try to put small companies over a barrel, which is unfortunate,” he says. “Getting good representation from a counsel perspective is really helpful,” he says, to ensure management is not in a position of being unfairly exposed.

Sometimes, despite everyone’s best efforts, a deal goes south.

“Processes only break for one of two reasons,” says Federer. “There’s been some external factor in the markets that’s had a devastating impact on the markets in general and it’s not within anyone’s control,” he says. “Or there’s a problem with the business.”

A business owner can’t do much about the first scenario, but much can be done to prevent the latter.

If, for example, the outcome that’s going to stop a sale is a key member of management walking, then do whatever is necessary to lock that person down with financial incentives. If missing targeted profits is the potential problem, then prepare forecasts with enough cushion to ensure you meet those numbers, Federer advises.

Ultimately, if now is the best time for you to exit, then drive the sale no matter what the markets are doing. “If you’ve got good reasons for exiting your business, then you do as much preparation in advance as you can – and then you move forward,” says Marshall.

This post was updated June 3, 2016.