Like living, breathing organisms, most businesses have a natural life cycle: early growth, rapid or steady growth, mature growth, and decline. We have sold businesses during various stages of the life cycle, and each stage comes with its own risks and potential. In a perfect world, business owners would sell during the period that offers the most potential and least risk to a buyer…the scenario that promises the best purchase price. But the planets don’t always align perfectly, so let’s look at the pros and cons of each stage.
Early growth is usually characterized by increased sales with minimal profitability, and sometimes negative cash flow. This period usually lasts fewer than three years. The potential of the business at this stage is very high, but so is the risk since about 90% of businesses fail within the first 36 months of operation. Buyers of businesses in the early growth stage typically do not pay top dollar because of the risk associated with this stage.
During this phase, sales continue to grow, but likely at a slower pace than the previous stage. Cash flow begins to catch up to growth and the company should show a profit. This stage can last for as long as 10-15 years. The longer the company is in this growth pattern, the more valuable it becomes. Companies with annual growth of 10-20% are lower risk and command a higher price from buyers.
Mature growth can happen for a variety of reasons; for example, the industry may have matured, or the owner of the company may have lost energy, interest or resources to put into the company. During this stage, there is a slow-down of growth; however, because the company is more mature, profits usually increase. Some buyers believe this stage is risky, while others perceive the risk to be low. A sale during this period must be properly positioned to provide the most benefit to the seller.
Once a business stops growing, it begins to die. That doesn’t mean the business has no value or that it can’t be revived, but the risk factors increase. And higher risk equates to lower purchase prices.
So, if the business is not in the ideal sweet spot, when is the right time to sell? The best time to sell a business is when the owner is ready to sell. Every year, many companies are sold which are in every stage outlined above. There are investments group that specialize in acquiring businesses within each of these stages.
Call 913.648.0185 or email us at email@example.com for a confidential discussion. We can work with you to carefully plan an exit that gives you the most value for whatever stage your business resides.