When Is The Right Time To Sell To Maximize Your Return?

October 23, 2021

If you’ve read other posts, you’ve come to realize that your cash flow – or your EBITDA – is the most critical measure determining how much your business is worth.  While there are many approaches, the most critical period is the twelve months leading up to the sale of your company.  That EBITDA – your “trailing twelve months” or TTM, is the benchmark used by most potential acquirors to value your company.

Some acquirors may use the prior fiscal year’s EBITDA, or may average EBITDA over some period (the prior 3 years is not uncommon), but your business’ EBITDA over the preceding 12 months is the touchstone of any valuation because banks will use that number to determine how much they will lend towards the purchase price.

So, when is the “right” time to sell?  Ideally, twelve months or more after you’ve taken steps to (i) improve your EBITDA and (ii) reduce your net working capital.  If you would like our help with fewer than 12 months prior to sale, we can certainly improve the value of your business (and will market the business based on the improvements), but it will be somewhat more difficult to recognize the full value of your company with less The “wrong” time to sell (from a valuation standpoint) is when you’ve finally decided you’re ready to retire – because your business won’t show the profitability improvements we can help you achieve that will drive a higher purchase price.

Aside from maximizing purchase price, there’s another constituency to consider – your employees.  Remember that financial sponsors use borrowed money to acquire companies, and debt creates a great deal of strain on contract manufacturers who generally bare market risk on the products they manufacture.  Debt also limits your ability to buy new equipment (banks treat equipment leases no differently than any other form of debt).  But the healthier and stronger your business, the more likely it is to weather the storms and survive.  And that means jobs and careers for your employees, and the health and wellbeing of their families.

And that’s why we came together to form AIS.  Because whether its your family, or the families who depend on your business, we want to help.