When to Sell Your Business: Capitalizing on the Business Life Cycle
If you’re a business owner, you know the dream; buy or start a business, work hard to develop it, and watch it grow into something you’re proud of.
Then, once the business runs smoothly without your constant input or you’ve found someone you trust to manage it, you’ll finally be able to enjoy the freedom that comes with being your own boss! When you’re finally ready to retire or move on, you’ll sell your business and the profits from the sale will fund your retirement, provide a down payment on your next business purchase…
But there’s a problem with this way of thinking. By not taking into account the natural life cycle of a business, you can rob yourself of that nice payout…or even worse not be able to sell at all.
The Life Cycle of a Business
All businesses have a life cycle – they grow, mature, and eventually decline or re-invent themselves. How long this cycle takes depends on the structure of the company and the owner(s), but at some point all companies go through the following stages:
GROWTH STAGE: During the growth stage, the owner(s) are infusing the business with energy, ideas, and money. There are new procedures, products, and customers, and often new employees and suppliers. Profits start out low but keep rising, improving the value of the company.
MATURITY/STABILIZATION STAGE: This is where the owner(s), and the business, naturally reach a leveling-off point. The owner(s) have reached the limit of what they can do to grow the business. This can happen for any number of reasons: market saturation, competition, a changing customer base or sometimes simply the owner(s) wanting to work less. Whatever the cause, the maturity stage marks a period of stability and predictable day-to-day operations.
FORK IN THE ROAD: RE-POSITION OR DECLINE
DECLINE STAGE: The business enters a decline phase as the owner begins to back away from the business. This usually happens because they lose interest, start retirement, are burned out, face financial difficulty, or experience health issues. At this stage, when the business loses ground there’s no big effort to bring it back. No one is actively trying to recover lost customers or investing in updated equipment. After all, the plan is to sell, so why keep putting money into it?
RE-POSITION STAGE: If the owner has the energy, desire and capital they must think about the business as a “start-up”. The product/service, marketing and procedures are modified to meet the changing market conditions. The “former” business is history, the “new” business is now back in the Growth Stage…requiring a roll up the sleeves mentality. The thing that gets most businesses in trouble when they decide to go through the Re-Position stage is the difficulty in looking at the business with a fresh perspective (“hard to see the forest through the tree’s”).
Why Selling Your Business at the Wrong Time Devalues Your Business
As you can see from the above scenario, many business owners sell during the DECLINE phase, when the value is actually at its lowest! And while the owner still sees the worth of the business based on the work and money they invested in the past, a potential buyer only sees dropping sales, poor customer retention, and outdated equipment.
That’s why the longer it takes to finally make the sale, the more money you lose. Because once your business is in the decline phase, you’re faced with a difficult decision: selling it at a reduced price because it’s no longer a growing or stable business, or investing money and effort to “bring it up to speed” and make it more attractive to buyers. Either way, you pay (with time, money & energy).
How to Use the Business Life Cycle to Your Advantage
How do you avoid ending up in this difficult position? By selling your business when it’s at its prime (during the growth or maturity stage), or being prepared for the sale way ahead of time.
Many business owners have made enormous profits by selling their business in the growth stage (think start-ups that were acquired by major companies). You can also make a healthy profit from a mature business that’s showing consistent profits and stable operations.
If this sounds appealing to you and you’re comfortable selling your business at this stage, it’s wise to get the process started as soon as possible. Doing the groundwork early makes you prepared to accept a great opportunity or to sell quickly if your circumstances change (more on this in a future post).
If you’d rather be involved with your business right up until you retire, you can still see good profits as long as you plan ahead.
There are actually many ways you can run your business with transferred or shared ownership that lets you exit in stages rather than all at once. It requires planning well in advance, and understanding how to structure the deal but these options can let you retire at your own pace and still make a significant profit.
Whichever way you decide to go, knowing how to identify each stage of a businesses’ life cycle and pre-planning your exit strategy to meet your long-term needs are the keys to making sure you get back more from your business than you put into it.
If you’re interested in learning about your selling options, getting a professional business valuation, or getting help creating an exit strategy, please feel free to give Evolution Advisors a call at 916.993.5433 or visit our website: www.EvoBizSales.com