“This year will be my best ever. I want to wait until that’s done, then I’ll sell my company.” (a former client, spoken in early 2008).
As you can imagine, the “Great Recession” overran all of his hopes and financial plans several months after my client spoke these words. By January of 2009, when he expected to report his “best year ever”, GDP had dropped 5% and Standard & Poor’s index dropped 46%, his” best year ever” didn’t happen and his outlook for the next five years was down substantially.
I had lunch with that former client in 2011, and he was still waiting for his company to be worth what it was when he said those words. He was 64 when he decided to wait just 12 months. Five years later, he’s now 69 and still has most of his net worth in one, smaller, basket. Things are finally looking up now, and I hope that he’ll be able to sell his company sometime soon.
There are three messages in this story that are important for company owners to think about:
- The value of your company is driven by both internal and external factors. They don’t always work together. Waiting to maximize the value on internal factors doesn’t pay off if the external value drivers go the wrong way. On the flip side, if it is a “seller’s market (like it is today), take advantage of that and don’t wait to get everything inside the company perfect.
- Trying to squeeze the last few dollars out of a deal isn’t smart. The sure-fire plan to double earnings in the next quarter rarely happens smoothly. Even if it does, savvy buyers won’t pay a premium for a last-minute spike in earnings; experience shows that they’ll lessen the value of that by going back to a multi-year average of earnings for their valuation.
- Owning a private company is an inherently risky investment. Most of our clients have over half their net worth in a single investment whose value is subject to lots of outside forces. Its value is at risk of not just a big recession, but also risks like losing a key employee, losing a big customer, increased taxes, government regulation, worker’s compensation, interest rates, international politics, energy prices, health care laws, and more. If it looks like your internal value drivers are good and the external value drivers are good, then it is a good time to sell.
There are always reasons to delay a sale, but sooner is almost always better when most of your net worth is on the line.
Posted by John Hammett.