Timing your exit is crucial when it comes to selling a recruitment business – City comment
21 February 2014
A successful business sale, as with so many things in life, depends in part on getting the timing right. This, of course, isn’t the only factor but it certainly has an impact.
Thu, 20 Feb 2014 | Philip Ellis, Optima Corporate FinanceA successful business sale, as with so many things in life, depends in part on getting the timing right. This, of course, isn’t the only factor but it certainly has an impact.
There are many examples of people getting their timing right and selling very close to or at the top of the market. Some will tell you they could sense it was time to sell while others will admit their good fortune. But, for every well-documented, well-timed exit, there are numerous tales of owners who held on too long, only to miss the boat. These stories tend to be less well known as there is by definition nothing specific to report and the disappointed owners tend, understandably, not to publicise their misfortune too widely.
As we know, when the market turns it tends to do so in dramatic fashion – as what might be described as a bursting bubble. That was certainly the case in both 2000 and 2007, when owners hoping to exit would have seen a substantial reduction in the paper value of their business and the prospects of finding a buyer were dramatically reduced. At the risk of stating the obvious, it can be a long wait for a return to market conditions that offer an opportunity for owners to sell. Typically, businesses will have experienced difficult times in the intervening period and may not be as well positioned for a sale as they had been.
Psychology always plays an important part in business and there is intrinsic disappointment for an owner who waits too long and misses the opportunity to sell. By the time the M&A market starts to show signs of life again, especially after a downturn as extended as that post-2007, owners can become tired. This can lead to a reduction in ambition and a willingness to sell for a “reasonable” price rather than aiming for top dollar.
This phenomenon is one I expect to fuel an increased level of transactions this year. Buyers are actively seeking acquisition targets and owners are sensing the opportunity to sell. Valuations are generally expected to rise, so is it sensible to sell now?
Undoubtedly there are more sellers than buyers. The laws of supply and demand therefore dictate that buyers will have a choice of acquisition targets. It remains early in the recovery phase and many business are not yet ready to sell, so those that are ready have an opportunity to get ahead of the competition. But bear in mind that deals generally involve an earn-out or period of deferred consideration, so the exit will not be immediate. Depending on how the deal is structured, this might also give the vendors an opportunity to participate in improving performance in the period after completion of the sale.
However, for some businesses, the timing may not be right given their own circumstances. Examples of this might include:
There are many examples of people getting their timing right and selling very close to or at the top of the market. Some will tell you they could sense it was time to sell while others will admit their good fortune. But, for every well-documented, well-timed exit, there are numerous tales of owners who held on too long, only to miss the boat. These stories tend to be less well known as there is by definition nothing specific to report and the disappointed owners tend, understandably, not to publicise their misfortune too widely.
As we know, when the market turns it tends to do so in dramatic fashion – as what might be described as a bursting bubble. That was certainly the case in both 2000 and 2007, when owners hoping to exit would have seen a substantial reduction in the paper value of their business and the prospects of finding a buyer were dramatically reduced. At the risk of stating the obvious, it can be a long wait for a return to market conditions that offer an opportunity for owners to sell. Typically, businesses will have experienced difficult times in the intervening period and may not be as well positioned for a sale as they had been.
Psychology always plays an important part in business and there is intrinsic disappointment for an owner who waits too long and misses the opportunity to sell. By the time the M&A market starts to show signs of life again, especially after a downturn as extended as that post-2007, owners can become tired. This can lead to a reduction in ambition and a willingness to sell for a “reasonable” price rather than aiming for top dollar.
This phenomenon is one I expect to fuel an increased level of transactions this year. Buyers are actively seeking acquisition targets and owners are sensing the opportunity to sell. Valuations are generally expected to rise, so is it sensible to sell now?
Undoubtedly there are more sellers than buyers. The laws of supply and demand therefore dictate that buyers will have a choice of acquisition targets. It remains early in the recovery phase and many business are not yet ready to sell, so those that are ready have an opportunity to get ahead of the competition. But bear in mind that deals generally involve an earn-out or period of deferred consideration, so the exit will not be immediate. Depending on how the deal is structured, this might also give the vendors an opportunity to participate in improving performance in the period after completion of the sale.
However, for some businesses, the timing may not be right given their own circumstances. Examples of this might include:
- A dip in profits due to the loss of a contract. The profit and loss account should be repaired before starting the sale process, with profits on the rise
- Overreliance on the owner-manager. This will impact on valuation and deal structure and should be addressed before commencing the sale process
- Forthcoming renewal of a major contract. Uncertainty ahead of renewal might make a business unsalable if the outcome of the contract renewal will have a material impact on its future profitability
