Right Time to Sell
company at the right time can
make a big difference in the price that the shareholders receive. The
reason for selling can also affect the timing. Companies sell for a
variety of reasons—some are personal and some are business reasons.
the positive side, a good reason to sell is because the company is
experiencing solid growth and potential acquirers clearly need the
company's technology. On the other hand, if a company is still early in
its market development and buyers are not yet ready to move, it may be
wise to sell later rather than sooner.
of the primary reasons that a technology company sells is because it
has reached an inflection point in the marketplace. The company may not
be able to grow fast enough with its current resources; it simply can't
get enough traction. The business may be getting low on cash and cannot
raise more capital for growth. The shareholders may not wish to
contribute additional capital.
A company may require greater
sales and marketing capabilities to effectively address its market. A
long sales cycle can impair the company's ability to hang in there
until sales come in. In some markets the sales cycle can last nine
months or longer. Many firms cannot survive such a long sales cycle.
reasons can also motivate a desire for liquidity. Personal reasons
include the founders wanting to move on and try something new, or
perhaps retire. Health problems or disputes among the founders or
shareholders may also impact the decision to sell.
transactions are different from strategic transactions. If a
transaction will be valued on the seller's financial metrics, such as
EBITDA (earnings before interest, taxes, depreciation and
amortization), then a company should sell when EBITDA is high and the
projections are rosy. These projections must be realistic and
defensible, not pie-in-the-sky. If the market has matured and growth is
tapering off, you will not get as high a price as you would have when
the market was growing more rapidly. Buyers will know that the market
growth has slowed down.
strategic transaction is one in which the value is based on the
strategic fit with a particular buyer. This strategic value is
different from one buyer to the next. When is strategic value the
highest? It depends on who the value is strategic to. Strategic value
is extrinsic, not intrinsic. Strategic value does not exist by itself
or within the selling company itself. Strategic value exists only in
the minds of the buyers and it is different for each buyer.
A Few Myths
few myths persist regarding the best time to sell. One is that a
company should sell when it is at the top of its game. Another myth is
that the company should sell when revenues have peaked. Contrary to
what many think, the best time to sell may not be when the company is
at the top of its game. Rather, it is when the market realizes that it
needs your technology, IP or other key assets. This is when a buyer
will pay the maximum price for your company. Market timing is the
primary driver for receiving the optimum price when selling a company.
market may be on a different time schedule than your company's growth
curve. If a firm waits to sell until its profits or revenues have
peaked, there may be little growth left in the company. Buyers will
eventually figure this out and will not pay top dollar. Paying
attention to the reality of the market is not only a good business
skill; it has more influence on price than any other factor.
What about Selling
When Revenues Peak?
are several problems with planning to sell when revenues peak. One is
human nature. No one knows when the peak is. Or, the peak keeps
changing. Having worked with entrepreneurs for many years, I have
observed no lack of optimism in the minds of entrepreneurs. They
believe that revenues will always improve. As a result, companies delay
the sale, which can be detrimental to getting the best price.
multiples are bogus most of the time in strategic transactions. It is
profit that counts in business, not revenues. In strategic deals it is
the technology, intellectual property or other key assets that count.
People love to talk about multiples of revenues. It makes them sound
smart. Even investment bankers perpetuate this myth. (Investment
bankers like to sound smart too.)
People do not enjoy the
uncertainty of not knowing what something is worth; they crave numbers
for value. Sure, you can calculate the multiple in your head. But in a
strategic transaction it is the strategic assets that matter. Yes,
higher revenues are better. They prove that the market exists and that
customers are willing to part with their cash to purchase your
products. Revenues give credibility. But your technology is the same
whether your revenues are $4 million or $8 million.
may talk in terms of revenue multiples, but buyers do not think in such
terms. Buyers think in terms of how much value they can create with an
acquisition. What additional operating profits can they produce if they
make this acquisition? How will the acquisition speed up entry into an
Sometimes revenue multiples are interjected as
a negotiating ploy. A buyer may cite the revenue multiple to make his
offer appear attractive. Don't be fooled by a buyer who quotes
multiples of revenue. Valid comparisons cannot be made from one
transaction to another using revenue multiples.
A buyer is not
going to have an internal meeting with its acquisition team, discuss
the merits of your acquisition and then decide what to pay by
asking—what is the current multiple of revenues for this industry
sector? And then use that number as the price they're willing to pay.
No way. A buyer will figure out what it is worth to them. They will
calculate the cost to develop the technology themselves and add a time
premium. They may generate three scenarios—best case, worst case and
most likely. They will project the additional operating profit that
your company can generate and work backwards (usually by discounting)
to a range of values that make sense for them.
A recent example
is Intel's acquisition of CognoVision for $17 million in 2010.
CognoVision had revenues of about $1 million. Was 17 times revenues the
appropriate revenue multiple? Were similar transactions completed at 17
times revenue? Did Intel ask its investment bankers what the
appropriate revenue multiple was? Of course not; Intel determined the
price by figuring out how much value CognoVision would contribute to
Intel’s operations. Multiples of revenues had nothing to do with it.
Deciding When to
back to the question—when to sell? The answer is external to your
company. It is all about the market and the needs of the buyers. You
want to sell when you can get the best price. You get the best price
when buyers desire your company the most. When will buyers desire your
company the most? It is when a buyer can take your products and
services to the market in a big way.
Large firms need to
acquire technology, market knowledge and expertise. For a speedy market
entry, these firms often prefer to acquire rather than develop their
own technology. They also want to acquire companies that have a team of
people in place; a team that understands the market and the customers'
concerns. The best time to sell is when the larger companies decide to
enter your market sector.
How can a company know when this
situation exists? How can a seller know the mindset of the buyers? The
buyers may be in the market already or they may be in an adjacent
market with plans to move into your sector. Try to develop a deeper
awareness of your market, of the players in your market, and pay very
close attention to the big companies. Ask yourself some key questions:
- Is a bigger firm expanding into your
- Do you see a gap in their product line?
- Are they missing a complementary service
that your company provides?
- What if they developed a product or
service similar to yours?
- Has one of your competitors been
acquisition of a competitor may indicate the first move by a large
company into your market sector. If a big company with sales and
marketing muscle acquires your competitor, it will likely be a potent
force in the market, even if your technology is superior. If two
competitors are acquired, that is a signal to seriously consider
Selling too late can have a negative impact on value.
If the best buyers have already acquired targets or developed their own
technology, there is less of an incentive to acquire your firm. Pay
close attention to the nuances of the market. When selling a company,
the market situation is the primary driver for obtaining the best price.
For a more in-depth discussion about optimal market timing, please see
my book, Selling the
Intangible Company—How to Negotiate and Capture the Value of a Growth
Firm (Wiley & Sons, 2008).