Timing the exit process in the sale of a business

Experts across financial, academic and business fields agree that it is futile to try to time the market when making individual investment decisions. However, when contemplating the sale of a business, there are various internal and external considerations about timing the exit process that can help improve the chances of a successful outcome.

Assemble a team of experts

Once a decision has been reached to sell a business, timing the exit starts with fundamental preparation and strategic planning. This is where engaging with experienced financial and legal advisers early can help enhance the likelihood of a successful outcome. Notwithstanding macroeconomic factors, the business must be seen as a sound investment for the next buyer. In making initial investment decisions, buyers usually focus on recent financial performance, future capital requirements, and the management team’s quality.

Regardless of a type of transaction or eventual buyer, a strong management team with experienced people in all key positions will be essential in driving the exit process and ensuring value maximization. If there is a significant open position in the executive management or commercial leadership teams, it is prudent to fill that position and allow the individual six to 12 months in the seat before an exit process.

Position the company for strong financial performance

With respect to financial performance, the best time to exit is when the business is firing on all cylinders, exceeding budgets and demonstrating continued growth. Much of the buyer’s financial due diligence focus will be on the trailing 12 months of earnings before interest, taxes, depreciation, and amortization (EBITDA). This cash flow metric and the company’s capital expenditure profile are critical when determining the level of indebtedness a business can support and can directly impact valuation.

However, equally important are the company’s future prospects, which include demonstrating sustainable growth by accessing new markets, introducing new products/services, or taking advantage of industry trends. If, for example, near-term growth prospects require a capital investment, it may be prudent to make the investment and allow some time to demonstrate a ramp-up in financial performance before a sale. Buyers are often reluctant to increase value related to new or unproven growth initiatives, which can lead to a discount on the initiative's implied value or a change in structure (earn-out or future payments tied to the initiative’s performance).

Any sale process requires significant effort from all parties to facilitate comprehensive due diligence. This involves all aspects of the business, including operations, customer and supplier relations, HR, IT, health and safety, environmental, legal, risk management, financial, and others. The best advisers help business owners anticipate and prepare for such due diligence well ahead of starting the exit process. Due diligence creates significant demands on management’s time; being well-organized and prepared minimizes surprises during the exit process.

Strategically plan for impact of key external factors

Savvy business owners are generally cognizant of macroeconomic, geopolitical, and other extraneous elements that impact their performance. For instance, timing an exit during a U.S. presidential election cycle is always complicated — not because buyers prefer one party or the other, but mostly due to the uncertainty of potential policy directions until the results are clear. While stock market performance might dominate the airwaves before and immediately after elections, near-term economic indicators, cost of financing, and tax policies are significantly more important to sellers and buyers.

Geopolitical issues are increasingly impacting businesses across most sectors of the economy, particularly those exposed to tariffs, supply chain complications, labor issues (think port strikes), and more. One business might directly benefit from new or existing tariffs, while another might experience significant impacts in end-user demand because of prevailing tariffs. An industrial distribution business relying on a global supply chain may be severely disrupted by port strikes. While any single business owner cannot control these issues during a sale process, they should work with their advisers to be prepared to address business impacts and due diligence questions.

Thoughtfully time the exit

Transactions that require antitrust, national security or other regulatory clearances may need several months from signing of definitive agreements to final closing. For example, a sizeable specialty materials business with strong competitive position that sells critical minerals to the Department of Defense can expect multiple lengthy regulatory reviews before closing. If this business owner wants to close a transaction before a certain date, they should account for the regulatory approval process and start the exit process early.

Timing an exit process for a business requires introspection, strategic planning, and thoughtful preparation, while accounting for a host of internal and external parameters. Control the controllables and have a plan for potential surprises that invariably arise.

To learn more

Contact M&A experts Jeff Johnston and Arindam Basu. Visit key.com/M&A.