Brian Beaulieu has served as CEO and Chief Economist of ITR Economics™ since 1987, where he researches the use of business cycle analysis and economic forecasting as tools for improving profitability.
There are a myriad of factors that go into considering when to sell a business. Often, a primary goal is maximizing the after-tax cash considerations for the seller. We think an important economic consideration toward achieving that goal is knowing:
1. Where you are in the business cycle
2. Where your markets are vis-à-vis the business cycle
3. Whether waiting will afford you the opportunity to increase your EBITDA
#1 - Where you are in the business cycle
Your position in your company’s specific business cycle has a lot to do with maximizing your potential at sale. At the bottom of the cycle, potential buyers will see you as a distressed seller or look at the recent track record and see disappointing results. However, the opposite is true at the top of the business cycle. It is difficult to know when you are at the top. For one thing, it depends on how “top” is defined. ITR Economics’ methodology lends itself very well to objectively determining the different phases of a company’s business cycle. You can know if the company has years of additional ascent ahead of it, if the ascent is diminishing but contraction is not probable, or if a contraction in the business is likely in the foreseeable future. Knowing the timeline is fundamental economic business intelligence for objectively timing the sale of a business for maximum economic gain. Buy low. Sell high. It is real, and it is often overlooked because of emotional considerations.
#2 - Where your markets are vis-à-vis the business cycle
This consideration is more nuanced than the prior one. Your business may be flying high, or barely staying aloft, and your dominant markets could be doing something else. The disparity would be indicative of an internal problem that should be fixed before putting the business up for sale if maximizing after-tax considerations is the goal. The issue could be market share, product mix, wrong pricing, wrong people in certain positions, outdated technology – the list goes on. The key considerations then become: a) the cost of rectifying the issue(s), b) whether there is sufficient time in terms of the business cycle relative to the seller's personal timeline to effect change, and c) whether the after-tax improvement in the final outcome would provide a sufficient return on investment relative to the cost of fixing the issue(s). Selling healthy is generally better than selling when the company is in need of repair.
#3 - Will waiting afford you the opportunity to increase your EBITDA?
The duration of a business cycle is part of the answer to this variable, and it was addressed in #1 above. What we are referring to here is a timeline longer than a business cycle. The current business cycle is expected to peak in early 2022 (as measured by US GDP) and trough in 2023. That may not be the proper time consideration. Our analysis suggests that the ascent following the 2023 trough will lead to enhanced EBITDA growth opportunities and higher multiples. The next opportune time for businesses positively correlated to GDP will likely be 2025, followed by another cyclically opportune time in 2028–29. Granted, the variables involved over such an extended period often increasingly include non-economic considerations. However, all else being equal in that regard, knowing the “windows of most probable opportunity” for selling high should be part of the decision process. By the same token, a business negatively correlated to GDP would find 2026 and post-2030 more propitious times to sell. "Know thyself" and your cycles, and you will make better decisions when juxtaposed against outside business cycle probabilities. There may be instances when selling ASAP is the right thing to do. For instance, if a business is negatively correlated to a rising trend in interest rates, selling sooner rather than later as we sit here in late 2021 becomes a major factor.
Buy low. Sell high. Sounds so easy. Seems like some people are just “lucky” with their timing. We others must study the data and capture the best economic timing we can.
When addressing the optimal time to pursue a sale, owners should assess the different types of buyers available, and the ranges of value offered by those buyer types. For owners, layering together the considerations related to valuation, succession/exit horizon, liquidity needs, tax planning, and any qualitative objectives is a worthwhile process and may be undertaken with advisors like those you will find at ButcherJoseph & Co.