By The Bigelow Company LLC

“The right time to sell is when the right investor wants to buy.”  Don’t dismiss this as the proverbial example of a consultant looking at your watch to tell you what time it is.  Let’s look at this idea more closely.

When investors come knocking on your door, it’s an indicator of what’s going on in your industry. We’re not referring to form letters from business brokers on fishing expeditions. But when the contacts turn into something more direct and more personal, you’d better be listening. If someone in your industry wants to meet with you to talk about your company’s future, why not sit down with him or her? If nothing else, it will be a learning experience. If the interested party is a potential strategic buyer, it can’t hurt to learn more about their business.

The Time to Sell is When Investors Believe Your Industry is Hot

Most owner-managers are so focused on their own competitive position and growth that they don’t pay enough attention to wheretheir industry is heading. Although your company’s performance, measured by EBITDA, is vitally important in determining the value you can potentially capture, what’s most important with regard to timing is the multiple an investor is willing to pay. Clearly, it’s better to sell when investors are paying 10x EBITDA – not 6x – for acquisitions in your industry.

It’s not difficult to find out if your industry is in or out of favor withinstitutional investors.

• Identify the 3-5 public companies that are leaders in your industry
• Study their annual reports and their stock price trends
• Read what the big brokerages’ research analysts have to say about those companies and about your industry in general.  Typically, this research is easily available at no cost.

If your industry is out of favor with investors, it doesn’t matter how good your numbers look. From that point of view, it’s probably a bad time to sell.

What Can You Do if Your Industry is Not Hot?

Although private equity groups may be undervaluing businesses inyour industry, you might be very attractive to a strategic buyer. Your customer base, manufacturing sources, or proprietary technologies might be just what they need to strengthen their position.

Consider bank financing as a way to take some chips off the table.  (Review Lesson #5 – “Consider Taking a Down Payment on Your Business”)

Make management decisions that will make you more attractive down the line to a private equity investor (and increase your EBITDA along the way).

1. Consider hiring a COO.

Having one in place will speed or ease amanagement transition in an eventual transaction.

2. Make sure you’re taking on enough risk.

Slow and steady growth may be comfortable – but it won’t attract investors.

3. Invest in growth – not real estate.  Focus on what will increase your EBITDA and market share.

The Time to Sell is Before You Become Risk-Averse

For many owner-managers, the right time to sell is heavily influenced by their personal “comfort zone” or family situation.  We’ve encountered many successful entrepreneurs who become risk averse when the value of their business reaches a certain size (often far beyond their original expectations).  When the stakes get too big, their confidence wanes. They get scared of losing what they’ve built, and start acting too conservatively.

We’ve also encountered many family-owned businesses where the aversion to risk comes from family member/stockholders who are perfectly happy with the status quo.  They see business risk as a threat, not an opportunity, and create a major drag on growth.

Whatever the reasons, if you’re afraid to take risks, it’s time to get out – or take some chips off the table.  Modest growth might be comfortable for you, your family, and your employees – but it’s the kiss of death for attracting investors. Remember, if you are not taking full advantage of the market opportunity, somebody else will fill the void, and in doing so, adversely affect your market position and your business’ underlying value.

When Sales Hit $70 Million,it was Time for Will to Sell

These true stories (with details changed to protect the owners’ privacy) illustrate how two owner-managers decided when it was time to capture their value.  Will Goforth wrote Beaten Path Software as a tool for improvinghis travel agency’s productivity.

Software sales quickly sped past the agency’s commissions, so Tom shifted his focus to improving the software’s functionality. The travel industry jumped on board, and sales soared. At $15 million, and then again at $50 million, The Bigelow Company helped Will obtain financing to race to the next level.

At $70 million in sales, faced with the need for further investment (and new risk), Will lost his tolerance for risk.  He came to us worrying,“What if I screw it up? Maybe I’ll hit the $100 million mark, but what if I don’t?  There’s just too much to lose. I think I’ll invest in a new building.” It was clearly time for Will to get off the beaten path. We worked with him to find a strong CEO and invest his profits in product enhancements – not real estate. A year later, we represented Beaten Path Software in a recapitalization to a private equity buyer for $110 million.

What Was Right for Action Components Wasn’t Right for Sister Alice

This Atlanta-based manufacturer of automotive engine parts was earning a healthy $40 million annual pre-tax profit when the CEO came to The Bigelow Company looking for advice. Action Components was a third-generation, family-owned business with plenty of passive stakeholders – including eight siblings who relied on the company’s generous dividends. Eager to cash in, they were pressuring the oldest brother(and CEO) to put Action Components on the selling block.

Unfortunately, with investors driving away from the out-of-favor U.S. auto industry, it was perceived as an inauspicious time to sell.

Moreover, Action Components had a number of customers who werein difficult financial condition, and the company was worried about collecting its receivables, let alone distributing any future dividends. Working with the CEO, we initiated a “Dutch auction” that provided a liquidity event for those shareholders who were more interested in getting their investment out.  This allowed the CEO and certain other family members with a longer-term horizon to actually increase their ownership stake, for the “someday” sale of the business when the auto industry was in full gear.

This “Lesson Learned for Building and Capturing Value” reflects knowledge and insights we’ve gained working with dozens of privately-held companies throughout North America.  For more information about The Bigelow Company, visit www.bigelowco.com or call us at 603-433-6000 for a confidential discussion of your unique situation.