Risk Assessment – Timing the Sale

Risk Assessment – Timing the Sale

By Dan Halvorson

September 27, 2019

In the first portion of my career I was trained as a grain/commodities trader.  It took years of experience to master the assessment of risk and the subsequent decision of timing – when to buy, sell, or do nothing while awaiting a better opportunity.  A multitude of factors were analyzed to enable these decisions – fundamentals such as supply & demand, macroeconomics, and current markets; technical analysis; as well as human perception/emotion as it related to the markets being traded.

A trader has three choices as to positions – long (owning at current market in anticipation of prices rising), even (neutral position holding dry powder for next market signal), or short (selling current market, betting on a price decline).  There is, of course, inherent risk in either a long or short position but in order to make money trading, one or the other must eventually be taken as being even over the long term has no profit potential.

Interestingly, in my experience, being short was often the most profitable position.  Why?  Because human nature isn’t comfortable selling something that it doesn’t own.  Human emotion favors the long position of ownership and anticipating/knowing/hoping that values go up.  Importantly, it also seeks to sell at the top of the market.  There is a fear of selling too soon and then seeing prices continue to rise.  This, unfortunately, often leads to selling too late – missing the top and trying to get out in a rapidly declining market. As I mentioned previously, it took years of trading experience to learn to minimize the effects of human nature/emotion on the timing of trading decisions; to cover a short before the bottom or sell out a long before the market topped. This was key to maximizing trading profitability. In the words of Bernard Baruch – “I made my money by selling too soon.”

The owners of a private company are obviously in an inherent long position through owning their company.  However, while they are nurturing the growth and profitability and enjoy running the company, I feel they are in effect – even.  From a transaction standpoint – they can do nothing. If they wish to grow through acquisition though, they are adding to their long position.

Once an exit is contemplated, whether it be 1, 2, or 5 years out, the owners’ position is definitively long; and the risk assessment and decision on timing of the sale/transaction become vitally important.  In other words, it’s time to have a trader mindset. Planning and preparing the company for maximum value is necessary, the same as upgrading and possibly staging a home for sale.  Assessing risk factors is also key – what is the impact on value/saleablility if the company loses a large customer?  Or incurs unforeseen product liability? – opioid pharmaceuticals and glyphosate (Roundup) are recent examples.  Or a high performing member of the management team leaves?  Can the recent growth curve be sustained?

It is difficult for owners to make the decision to sell when the company is doing very well.  Human nature is optimistic and there is a natural tendency to hold on for ‘just a few more years’ or conversely to ‘get back to where we were’ if there has been a recent dip in profitability.  Recognizing the potential impact of emotions on this decision is very important. A good M&A advisor will be invaluable in working with the owners to rationally assess risk and the timing of a sales transaction with the goal of selling their long into a strong, rising market – before the top.