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  • Timing the Sale of a Company

    Jan 5, 2015

    The clients that come to IBA for representation in the sale of their privately held companies and family businesses traditionally do not need to sell, they want to sell. The most common reason our clients want to sell their business is to retire after a successful entrepreneurial experience. The second most frequent motivation for sale of a business is when an entrepreneur has grown bored with management of a company and wants to free up time & resources to create & develop a new business. A common question asked by these entrepreneurs during the strategic planning process associated with preparing a business for sale is “when is the best time to sell a company”. The following are some factors to consider when deciding when to bring a company on the market:

    1. The best time to bring a company on the market from a business valuation, financing, & due diligence perspective is shortly after completion of the fiscal year of the business, most commonly the end of the calendar year. The reason for this is directly related to the production of the company’s corporate tax return. The most recent corporate tax return of a business is the most important document in the sale of a business for several reasons. First, the information contained on a corporate tax return is traditionally verified by an accounting professional providing a business buyer, a professional evaluating the business to establish a market value, and/or a bank with the best source of current financial information available regarding the economic performance of the business. It is our recommendation that business owners strive to provide the most transparent picture of the operation and profitability of the business in the last tax return filed prior to sale. The information contained in a corporate tax return is also viewed as more accurate than internally generated financial documents by business buyers, accounting professionals, and lenders because the business owner is accountable to the federal government for the accuracy of the tax return.

    2. The best time to sell a business from a marketing perspective is 3 to 6 months prior to the company’s highest revenue period, if the business model has significant seasonality. For example, mall based and most E-Commerce retail businesses traditionally generate approximately 40% of their revenues between Thanksgiving and Christmas. The attraction of these businesses to entrepreneurs is highest between July and October because a party completing an acquisition can get two “Christmas seasons” in 14 to 16 months if they time their acquisition correctly while still providing sufficient time for a relaxed transition of ownership. Conversely, the attraction of these same business models to business buyers is traditionally very low during the first quarter of the next year. This is just one example of seasonality, the same principle holds true in the sale of veterinary hospitals with their strong summer revenues, manufacturing companies that supply industries with seasonal revenue spikes like retail or construction, and service companies, like those supporting Alaska’s fishing industry.

    3. The best time to sell from a legal & financial liability perspective is often 6 to 9 months prior to the end of a vendor contract. A common situation where this is true is in the last year of a commercial property lease, if the opportunity to extend the lease exists. The reason this is prudent for a business owner is because it is common for commercial landlords to require tenants assigning leases to continue to guarantee the lease post sale to minimize their risk of default. This can result in trailing liability for a business seller in situation where they have no control or influence. This guarantee can be avoided if the business buyer establishes a new lease with the landlord.

    4. The best time to sell from an administrative perspective is when customer & vendor relationship and staff stability exists. It is easier to hand off executive control of the helm of a business when all systems are running at peak efficiency. If customer turbulence or employee turnover is anticipated that information will come out when a buyer does due diligence prior to the acquisition. Business values will be maximized at time of sale if discussion on these issues occurs in a positive context. Negative information of this nature can result in a request for a price reduction or jeopardize a sale. It is preferred to sell when a quality team is in place and revenues and profitability are stable or growing. Business owners should be especially cognizant of this issue, if they have key “baby boomer” employees that will be transitioning to retirement in the future. Replacing these individuals is an issue that preferably can be passed on to the next generation of business owner with several years of lead time to prepare for the transition.

    5. The best time to sell a company that requires significant time & investment for research & development of their next generation of product (e.g., a software company) is immediately after the release of the most recent version. A sale timed in this manner facilitates a smooth transition of ownership without urgency to replace or upgrade the existing product immediately prior to or after a sale is completed. This timing can also result in a business having positive product reviews available to potential buyers and anticipated strong revenues & profitability for a period of time in the future.

    6. The best time to sell from a financial perspective is often early in the next calendar year. The reason this is prudent is that personal tax returns are filed on a calendar year basis. A sale at the end of a calendar year results in the sale proceeds being added to salary & profits received by ownership up to that point. This combination can result in a significant tax liability for ownership. Conversely, if a business sale is completed early in the next calendar year the likelihood of ownership having received significant salary & profits is low resulting in potential preferential tax treatment of the proceeds from the sale versus an identical sale completed at or near the conclusion of a calendar year.

    7. The best time to sell from an accounting & bookkeeping perspective is at the end of a month, quarter, or fiscal year. A business sale timed in this manner is prudent because a sale occurring at a natural cut-off point will facilitate a cleaner transition of tax liabilities & expenses.

    The sophisticated process involved in selling a privately held company or family owned business requires knowledge, experience, and a strong negotiation/facilitation skill set. It is our firm’s strong recommendation that an experienced mergers & acquisitions professional be employed to maximize the value received for a company while minimizing the associated risk & liability created when a business is sold.

    IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation in terms of successfully negotiating transactions that are “win-win” in an environment of full disclosure between the parties.

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