Continuing our subject of The Right Time To Sell Your Business, in this month’s article, we talk about Hockey Sticks and Selling Your Business.
What do hockey sticks have to do with selling businesses? More than you realize.
As I have discussed previously, business owners usually try to time the sale of their business in order to maximize the selling price. Unfortunately, trying to time the sale can lead to the phenomenon of either the Upward Hockey Stick or the Flattening Hockey Stick.
What do we mean by an Upward Hockey Stick? Consider the situation of Company A. It’s a nice little office equipment dealership. They’ve been in business for years and growing steadily at 2% per year. Then, Company A’s owner decides to sell the business and he lets buyers know: “Company A is going to grow significantly. Trust me, this is the year!”
The graph below depicts Company A’s sales history. You will see what we mean by an Upward Hockey Stick:
When Company A’s sales history is plotted over time, the owner’s prediction of substantial growth the year he plans to sell the business makes the graph look just like a hockey stick.
What is the problem with this picture? Why would a buyer believe after 10 years of 2% annual growth the business will suddenly grow by 50% or more in the year the owner is trying to sell?
There is an old adage: “One year is an accident, two a trend.” Buyers are reluctant to pay a high price for a business coming off its best year in history.
We are very accustomed to seeing Upward Hockey Stick graphs with start-ups or young companies. Owners will predict flat sales with a huge spike in growth in one year. While some Upward Hockey Sticks really do exist, buyers are very, very wary of them. Projecting this type of growth can negatively impact your credibility, never something you want to do with buyers or investors.
While the Upward Hockey Stick is a difficult sell, there is a bigger mistake business owners make in timing the sale of their business, otherwise known as the Flattening Hockey Stick.
Consider this situation: Company B is a distributor/reseller of compatible toner products and supplies. Company B has been growing rapidly over the past 10 years, anywhere from 10% to 20% annually. Then, growth starts to slow in 2014 and 2015 to 3% per year. Most owners with businesses similar to Company B would be tempted to try to sell the business after its sales have flattened out, thus seemingly “maximizing” the value of the business. However, the wise owner sells when there is still growth left in the company. Consider the graph below:
In the Flattening Hockey Stick graph above, to maximize the sale value of your business, you should sell where you see the arrow pointing (2011-2012) rather than when growth has flattened (where the star is placed, i.e. 2013-2014). You want to sell your business when there is still room to grow on the “handle” rather than when you’ve reached the “blade.”
In our experience, buyers are willing to pay more for a rapidly growing business than a flat-line growth business. That’s why it is important if you are considering a sale of your business not to wait until there are no growth opportunities for the company.
Trying to figure out the best time to sell your business is never easy. Most people’s crystal balls are murky at best. However, if buyers tell you they do not want to buy or invest in your hockey stick, now you know what they mean.
I am happy to answer any of your questions regarding this subject or any previous articles. In my next article, I’ll discuss the subject: The Absolute Best Time to Sell Your Business.
