When contemplating selling their companies, owners inevitably come to the same question: “What’s the best timing?”
While I’ve discussed the best time of year to sell, the bigger question of how soon you should plan to exit takes some additional consideration.
Some owners think, “Well, I’ll be ready to retire in a couple of years, so I have some time before I get started. After all, the selling process usually doesn’t take longer than a year from start to close, right?”
While that is technically true, these owners fail to account for ALL parts of the selling process.
Think of it like taking a flight. Sure, the flight itself might only be 3 hours long. But your trip is a lot longer once you factor in packing what you need, getting to the airport, checking in and going through TSA, boarding, de-planing, waiting at baggage claim, and getting a rideshare or taxi to your final destination. All of a sudden, your “3-hour flight” is now a 7-hour trip.
So, how should an owner plan their timing to truly exit? There are three different parts of most M&A transactions that owners should consider.
The Deal Timeline
To get started, let’s look at how long it takes to complete the deal itself. This is the “main event,” or the “flight” in our earlier metaphor. For those who are prepared and ready to go (more on that later), the process from first deciding on an advisor or broker to actually closing the deal can take anywhere from 8 – 12 months. Below are the six steps in the deal timeline, which I explain in detail in Part 1 of my book, Get Acquired for Millions. Could it take less than 9 months? Sure. But if you are really looking at multiple buyers and not just the one that may have contacted you, the process typically takes 9 months.
The Earn-Out Period
Whether you are selling to a financial or strategic buyer, every deal has at least a couple of the following components as part of the terms: cash, note, earn-out, and equity. Ideally, you would love 100% cash upfront. But in reality, 95% of the time there is an earn-out component as part of the transaction terms.
The average earn-out period for technology service providers is around 24 months. Yes, some could be as short as one year and others can occasionally be as long as three years, but we will stick with the average here. In our metaphor, this is like de-planing, waiting at baggage claim, and driving to your final destination. Your trip truly isn’t complete until you accomplish those steps.
So, if we add the deal timeline and the earn-out period together (again, using averages), we can see that the process now takes an average of three years from going to market to receiving all your cash (excluding any deferred equity cash-out).
This timeline above assumes, of course, that you are ready to start the selling process immediately. But for most owners, that is not the case.
The Preparation Period
If you’ve been following my content, you know that I put a lot of emphasis how to prepare your company to sell. That is because it is key to achieving the highest valuation for your company. It also can take quite some time.
A good rule of thumb is to start preparing 1-2 years in advance of going to market (or 3 years in advance of your expected sale date) if you’re close to your desired valuation. It usually takes that long to get everything in order while you continue to drive KPIs like revenue and net income.
(Not sure if you’re close to your desired valuation? Try our Value Maximizer Assessment™, which will estimate your current value and show you where/how you can increase it.)
In terms of our flight metaphor, preparing for the sale is the same as packing what you need, getting to the airport, checking in and going through TSA, and boarding. Without those steps, you won’t successfully get on the plane.
This preparation period is all about getting your company and its finances in peak condition to be most attractive to buyers, help the sale process go smoothly (especially due diligence), and ultimately increase your sale price. This can include:
- Converting from cash or semi-cash accounting to
full accrual - Making sure all customers are under a current
contract or engagement letter - Identifying normalization or add-backs
- Finalizing the documentation of any and all
intellectual property being used in the business - Hiring personnel into key positions or filling new
positions that will be critical for a smooth post-close transition. - Getting an independent audit or review of your
financials (like a Quality of Earnings Report)
For a more comprehensive list of items you should work on in the preparation period, take a look at this guide to preparing for a sale, as well as this IT Pre-Due Diligence Checklist.
I also highly recommend joining my digital course, Ready…Set…SELL, made specifically for IT business owners to better understand, plan, and prepare their company to sell to their ideal buyer at the highest potential value.
With this in mind, your timeline to prepare for the sale, complete your transaction, and achieve your earn-out now looks more like this:
Conclusion
So, if you truly want to retire and cash out in the next 4-5 years, the time to get started is now. That is especially true if you haven’t started preparing for a sale yet.
If you have started preparing, that timeline might look a little shorter. Again, use the resources linked above to assess how close you are to being ready to go to market.
You can find even more resources focused on preparing for a sale on our Downloads page.
Not sure if you are personally ready to exit? We have an quiz for that. It’s a bigger factor in deal success than you probably realize.
The Steps Owners Should ACTUALLY Take to Get Ready for an Exit