Knowing when to sell a business is challenging, says Richard Hamlin, executive vice president of The Reserve Group, a family office and management company. While much depends on the owner's personal situation, there can be trepidation when trying to determine when both the market and the state of the company align to generate optimal returns.
"Most people would say you sell at the peak. When is the peak?" Hamlin said during the Cleveland Smart Business Dealmakers Conference. "And I think a lot of people probably asked this question — I'm worried about either getting out of the game too early and leaving chips on the table and selling at less than full potential or holding on too long and missing the window of opportunity to sell. I know those are the questions that we talk about."
He says owners need to consider their specific circumstances. Are they willing to go through the next economic downturn? And if so, do they have the stomach, the patience or the capital to do so successfully? It's also tough to time the market.
"Looking at those market conditions, the headwinds, the tailwinds, how long are my tailwinds going to support me?" he says. "I don't want to get out if I'm enjoying harvesting this really nice business. But I also don't want to miss my window. And we have that experience of missing a window."
He says he had a company in oil and gas around the 2007 timeframe, right before the big crash. The business was taken to market to sell, got great projections and lots of offers. Then the market softened.
"And we said, No, this has been a fantastic company we've harvested for a long time. We're not going to sell short. We're going to hold on to it. Fast forward to today, we still own that business, but we've never seen the valuation ever come close to what the market was suggesting it was at then," he says. "So, we missed our window. And I think, when do you sell? That's the million-dollar question. I think it's very personable for everybody. And timing it is really tough. But do your homework and understand your market conditions and do what's best for you."
Something to account for is the emotions that can arise in any deal. That could be excitement, anxiety, even frustration. But Hamlin says never let your desire to buy exceed their desire to sell, and vice versa.
"If that happens, if emotion comes into play, there's opportunity for someone to maximize on that deal," he says.
One way to stay even keeled through a deal is to involve a board of advisers. They typically have nothing to gain or lose, so they can be a sounding board for ideas like selling the business and offer a dispassionate response.
"They can receive and hear the story and give you recommendations without having that emotion, or that reaction, because they don't have skin in the game," Hamlin says. "So, I think that's a way to take the emotion out of it is use your board of advisers."
Most people that he encounters on a transaction have never been involved in deal. That can mean that they're seeing a deal through the lens of fear and uncertainty — they have no idea what this is going to mean for them and their future. It's important, then, to include key people in the planning as soon as possible.
"It's a balance when you can bring everyone into the inner circle of trust that tells them we're going to go to market and we're going to run this process," he says. "But the sooner you can bring the CEO, of course, and the management team into the inner circle, the better so they feel like they're part of this process. And we're big believers in incentivizing them to be part of the process, to be successful and paint the vision for them, what's in it for them? Not everyone believes in stay bonuses, but there's value in them maximizing and executing on their plan. So, I think it's critical to doing a good deal is including people as early as possible."