The best time to sell may be when you don’t have to

“Why would I sell now? Things are going great” is a sentiment often heard from successful business owners. But that may be exactly when an owner should consider a sale. Waiting for a life event or business downturn can reduce both valuation and negotiating leverage. Even if an owner ultimately decides not to sell, exploring the market can provide valuable information about the company’s potential value, deal terms and the metrics buyers consider important.

1. Get started early. The best time for a lower middle market company, defined here as $10 million to $100 million in revenue, to prepare for a sale is before it is under a potential buyer’s microscope. Preparing early allows an owner to work at a chosen pace without becoming distracted from managing the business.

2. Mitigate future risk. The level of real or perceived risk a buyer may face post-transaction is a critical factor in determining the purchase price and valuation of a business. Risk can come in many forms besides general economic or geopolitical conditions, such as from customer concentration, declining demand, technology shift, reliance on one supplier, or not having key employees who can step up post-transaction. The absence of actual or threatened litigation is also obviously a plus.

3. Understand what commands a premium. Buyers place a premium on recurring revenue, profit margins higher than industry averages, having a management team in place, low customer concentration, more than one supplier, increasing revenue and earnings trends, and a clear growth strategy. Additionally, businesses that have competitive advantages , or that operate in industries with barriers to entry, are also more attractive to buyers than ones without.

4. Put yourself out of a job. Companies attract a premium when the owner is less essential to the daily operations of the company and when revenue is not dependent on the owner’s personal relationships with customers and those relationships are distributed amongst other employees. Buyers know that once a seller receives a large cash pay-out and despite best intentions, their motivation is not the same. It is generally best for all parties if the owner completes a transition period, usually ranging from a few months to a year. While this is a generalization, there are exceptions where the former owner and the buyer mutually agree that it would be beneficial he or she stays longer.

5. Financial reporting. Most lower middle market companies are valued at some multiple of the adjusted earnings, or EBITDA (earnings before interest, taxes, depreciation, and amortization). This metric is used to measure a company’s overall core profitability, and “adds back” such items as one-time expenses, personal expenses which may be run through the business, and other adjustments. The financial model which an M&A advisor develops for this purpose is therefore very different from what an accountant prepares for tax purposes, which is typically structured to minimize taxable income.

Being able to generate monthly and accurate financial reporting is critical to advancing the sales process in a timely manner. Appropriate processes should obviously be put into place irrespective of a sale so that an owner can make informed decisions, but in the context of an M&A transaction, not having timely and accurate financial information can kill a deal or lead to an incorrect outcome. Having an outside accounting firm that has the resources and willingness to be responsive is a top priority, and if the owner is not confident that their current accountant meets this requirement, better to make a change now.

Ultimately, the owners who achieve the best outcomes are those who prepare early, reduce risk, and build a business that can run well without them. Even if a sale is years away, the steps above make the company stronger today — and considerably more valuable when the time comes.

Gregg Schor is CEO at Protegrity Advisors, where he advises owners of privately held lower middle market companies on mergers, acquisitions, and succession planning. A resident of Bluffton, South Carolina, he works with business owners throughout the Southeast and across the country.