When is the Right Time to Sell a Business to Maximize Valuation?

March 17, 2018

Observe due measure, for right timing is in all things the most important factor. Hesiod, Greek poet, 700 BC.

Timing is the most important factor in maximizing valuation in the M&A process as well. There are multiple cycles at work in M&A in the technology sector: capital flows, competition, technology, and economics. It is critical to follow each cycle carefully to determine when to sell. It is also important to honestly examine your company’s strengths and weaknesses and thus the probability of growing into a billion dollar unicorn.

Monitor Capital Flows

The chart above is very positive for capital flows in the technology sector. Nevertheless, not all companies will secure a Series B round. Venture capital firms will typically have 2 home run firms out of 10 where they will focus their attention and capital. 3 firms will do well, but not spectacularly. 5 firms will be neglected and may not get their current venture capital firm to invest in them for the B round. If the current venture capital firm, that knows the company best, does not invest, it will be challenging to secure a B round from another source. It is always beneficial to run a parallel track, seeking a B round and looking for an M&A exit, since this generates the most options for boards to consider.

Consider Selling Your Company When Your Competitors are Selling

When a competitor is acquired by a large company such as IBM, the intensity of increased competition comes as a shock to its competitors. Small companies with only one or two products and a minimal sales force are suddenly competing against IBM, with its thousands of products and global salesforce army. Also, the number of logical buyers just decreased by one, since IBM is no longer a potential acquirer. M&A is a game of supply and demand, and when the number of acquirers decrease, so does demand and thus valuations. Being the fifth company to sell in a subsector usually results in a poor valuation due to the simple calculus of supply and demand.

Know the Hype Cycle for Your Technology

The technology hype cycle is an important consideration in selling a business. Valuations are higher for early stage businesses at the peak of “inflated expectations“. One can also wait until the “plateau of productivity“, but there are execution risks to reach that stage. As an example, it is much easier now to sell an augmented data discovery company than an ad tech company since augmented data discovery is near the peak of expectations.

Sell when the Economy is Healthy

M&A is often a question of a board’s confidence in taking risks. If the macroeconomic environment is healthy, boards will be in an acquisitive mood. If the economy dips into a recession, it will be much more challenging to sell any company, since most boards will not be willing to take risks, but instead will be focused on cost cutting and monitoring cash flow. The current bull market marked its ninth birthday on March 9, 2018 It is the second-longest and second-largest bull market run in history.¬†Unfortunately, all bull market runs end, and when they do, M&A activity slows to a crawl. If you do not sell a company in a healthy economic environment, be prepared to wait for years through a recession until the economy picks back up again.

Honestly Analyze Your Companies’ Strengths and Weaknesses

Companies typically sell at certain milestones: minimal revenue, $10M in revenue and $100M in revenue. It is important to honestly analyze your company’s strengths and weaknesses and thus the company’s ability to get to the next stage. Part of this calculus what the management team enjoys doing. If the management team enjoys the excitement of developing a new product and building a company from the ground up, it should consider selling at the minimal revenue or $10M revenue stage and then moving on and building the next exciting company. If the management team enjoys board meetings, investor meetings, and management meetings and is confident that the company can grow to $100M in revenue, then the company should wait to sell until it reaches that stage. Very few companies are led by executives such as Bill Gates that can grow their company to the current impressive figure of $90B in revenue. An honest assessment of the company, including the management team, will result in the right time to sell at the highest valuation.

Set Aside an Hour a Week

It is practical to set aside an hour a week to monitor the capital flows, competition, technology, and economics. and then determine when is the best time to sell. A company can have a fantastic product, a seasoned management team and growing revenue and still miss the window on a sale resulting in a much lower valuation. Being the first company among its competitors to sell, selling at the peak of the hype cycle, and selling in a healthy economic environment all will maximize the valuation.

The tide is far more important than the swimmers. Warren Buffett