As an M&A advisor, I get asked this question all the time. And as a former CEO of two technology channel partner businesses, it was a question I asked myself all the time. It is truly a natural question to ask if you have managed a company for more than 20, 25 or even 30 years, as everyone who has worked in their business that long, ultimately wants either to leave it to their children or sell it for a high price.
Well, leaving my business to my son wasn’t something he was interested in, and my employees really weren’t interested in becoming business owners, so I had one decision left. When to sell!
Today we can add to this decision two other factors: the current COVID Pandemic and the elections. Ok, we know the winner – or at least we think we do. But what about the capital gain rates? Or ordinary gain tax rates? Will they go up? When will they go up? While all these thoughts circle in our heads, that is not what we should be thinking about. Instead, I encourage you to think about the following questions. And if the answer is predominantly yes, then you have your answer!
Questions to determine if NOW is the right time to sell your company:
- Is revenue continuing to increase? Better yet, is your revenue growing at least at 10% or greater than the market? While COVID will allow for a small blip on the radar, if your revenue has been slowly declining you might have missed the best window to sell. If not, then you are looking even more attractive to prospective buyers.
- Is your gross profit margin (GPM) stable or increasing? Most buyers look very carefully at this number as an erosion of GPM may indicate shrinking margins or competitive pricing. Plus you will want to make sure you can benchmark yourself against the competition and be within applicable ranges – See my blog on metrics. Stable or increasing GPM is a positive sign to buyers that you are in control of your margins and other costs.
- Are you debt free? Sure, everyone has a little vendor debt. What I mean here is long-term debt or a line-of-credit outstanding. If you do have a PPP or EIDL loan, buyers will want to incorporate that into the deal, meaning you will be on the hook until either the PPP loan is forgiven or you will need to pay off the EIDL loan with your proceeds. If you have neither, or know your PPP loan will be forgiven, then this answer is YES.
- Is your EBITDA increasing or at least remaining the same? Like your GPM, this is an indication of the health of the company. Again, a small blip for COVID is understandable, but most technology service providers are now starting to bounce back. We like to see companies between 12% – 17% EBITDA or at least “adjusted” EBITDA consistently.
- Do you have a track record of successfully moving your on-premise clients to the cloud? And do you support cloud solutions as your main product line? I see too many partners hanging on to “traditional” on-premise customers because they are still able to sell them services and maintenance, but those days are numbered. The longer you hold on to that the less valuable your company will become over time. If you can show however that your are selling more cloud solutions and or converting existing customers, a buyer will find this attractive.
- Are your top three clients less than 15% of your revenue? I have seen more than one deal either fall-apart or stall out completely due to one customer representing a large amount of the total company revenue. Granted, this is not an easy or quick fix, but you really need to focus on reducing that exposure by adding additional clients. Even if those clients have been with you “forever”. Of course, there are some rare exceptions to this rule, but don’t count on those exceptions playing out for you. If you client revenue is fairly well dispersed, then you show less risk to buyers.
- Do you still have the energy and desire to work another couple of years? This is a big one, because we still see that almost every deal (there are some 100% cash deals still out there) require that the owner(s) remain for a couple of years while they work through their earn-out. And these will be a couple of very busy years. If you are currently able to sit on the side-lines while your business runs on its own, that is likely to change once someone else owns your company. They will want you to contribute to revenue or to be a part of the integration and change management, which many owners enjoy. Just know that it will be a couple of fast paced years and you don’t want to wait until you have no gas left in the tank, otherwise your earnout may not work out as planned.
If you answered “YES” to at least 5 of these questions you are in a great place to think about selling NOW and not waiting until [ fill in the blank] changes.
Here is the great news, as a technology service provider, COVID has not affected valuations. Actually, from what I have seen, they never dropped, not even for a few months. What did change however, were the terms, with typically less cash up front. But I am starting to see that return back to 2019 percentages as people get more comfortable with revenue going forward and leaders have gotten a hold of how best to run their businesses during these unprecedented times.
Of course, if you have a crystal ball, then wait until you get the right “vision” to tell you when to sell. If not, then just step back from the noise of COVID, elections, tax rates, and the future of the stock market, and make a pragmatic decision based upon the questions above. I believe answering these questions will give you more clarity!
Still unsure, then take our Quiz: How prepared are you to sell your company?
This 7-question quiz will let you know just how prepared you are now to sell your company.
The importance of understanding “Adjusted EBITDA”: Revised for COVID 19