In the end, companies are bought, not sold. That’s the ideal scenario, at least. But in order to ensure that your company serves as the most attractive target for potential buyers, the right timing for the acquisition is crucial. It will lead to the highest valuation, the best terms & conditions, and the highest leveraging power for you as a seller. But relying on your gut instincts won’t suffice for this decision, as “When it feels right” is often not the actual right time to sell. That’s why continually reassessing whether you’re ready to take that step will pay off.
There are of course multiple aspects you need to consider when it comes to the right timing. Today we want to focus on (according to our experience at Samira Advisors) some of the most influential and important ones.
Disclaimer: We, of course, are fully aware that the individual perfect timing for each company depends on many more factors than we can elaborate on here. But we are certain that the information provided below is a good way to start thinking about the topic.
The right (sales) timing is everything
The growth that your company is showing and projecting for the future is one of the most dominant influence factors on the right selling point. Furthermore, it represents the factor over which you, as the management of your company, possess the most comprehensive information and wield the greatest ability to influence.
The S-curve model offers a framework for understanding the optimal timing to sell your company, mapping out typical growth patterns from introduction to decline. Early on (Point A), you should only consider selling if you have to. That is because at this stage you probably haven’t achieved product-market fit yet, and therefore won’t be an attractive target for buyers. Instead, you should focus on building strategic partnerships and integrating your product with complementary technologies to enhance valuation potential. As growth accelerates (Point B), be cautious of selling too soon, as substantial value may remain untapped. If you decide to sell here, make sure to capture some of that future value (e.g. through earnouts). Breakeven (between Points B and C) signals a prime opportunity for sale, with Point C marking significant positive cash flows and continued growth potential, implying the highest possible valuation for your business. This period often comes after a period of dependence on external funding and setbacks, and it’s vital to recognize its significance, as waiting too long can result in missed opportunities. At Point D, growth rates diminish, necessitating a more strategic approach to attract buyers based on synergies and future mutual growth potential.
While the S-curve provides insight, actual timing varies and depends on numerous factors beyond your control, highlighting the importance of regular reassessment and strategic planning.
The trend shall be your friend
As we’ve seen before, buyers seek companies that showcase a high growth potential. In terms of industry, this ideally means selling before the market becomes saturated, when your products are seeing a consistent increase in demand. Current dominant examples in the technology sector are e.g. Artificial Intelligence, a vertical that has attracted substantial investments over the last few years and is high on the investment agenda of most business leaders.
Other verticals that are showcasing immense growth potential are Internet of Things (IoT), Cybersecurity, Healthtech and Greentech, with the last of the two not showing any sign of slowing down due to increasing societal and environmental awareness and demand for solutions addressing pressing global challenges.
Particularly in an uncertain economy, when you’re unsure if selling is the best option, narrowing your focus to your specific industry and emphasizing its potential can make it easier to attract buyers and achieve a higher valuation.
Macroeconomic Alchemy
Of course, the right point in time to sell your company will neither solely depend on your growth potential nor the industry you operate in. The macroeconomic climate plays an important aspect you will be forced to factor into your decision. An optimistic environment leads to higher prices on public markets. Since many transactions involve a publicly listed company, those deals are often paid partly in shares, which means higher prices on public markets lead to higher deal volumes being paid. After all, we have seen in 2023, that peaked inflation, high interest rates, and geopolitical tensions hinder dealmaking, which makes it increasingly difficult to sell a company, even if the timing is right.
Ideally, you’d want to sell your business in a highly active M&A market to achieve the highest possible valuation. If the macroeconomic odds are in your favor, this will of course make the selling process much easier. Several macroeconomic trends are indicating a recovery of the M&A market in 2024, and we are already seeing a flurry in deal volumes in Q1 of 2024, suggesting that dealmaking is getting back to normal levels.
Mastering Market Magnetism
The competitive landscape can influence the attractiveness of your company to potential buyers. If your company is in a highly competitive market and struggling to maintain market share or profitability, it might be advantageous to sell sooner rather than later. Conversely, if your company has a strong market position and is outperforming competitors, you may want to wait until your company’s value is maximized before selling.
Furthermore, consolidation within your industry can create opportunities for your company. When the industry you are operating in is maturing, and companies are beginning to merge with one another in order to grow, this phase indicates a favorable environment for selling your company, as the interest of larger, strategic buyers is heightened.
Navigating the potential legal labyrinth
From a legal and regulatory perspective, there are a lot of aspects that influence whether it is an appropriate time for you to sell your company. First, antitrust regulations come into play from the buy side. But even though this doesn’t directly impact you as a founder or your business, given that it is probably too small to be affected by antitrust regulations, such regulations still prolong the transaction process. Recently, JPMorgan’s co-head of EMEA M&A, Dwayne Lysaght, said companies have to be willing to wait 18 months or longer for transactions to close, adding that the time it takes to complete deals has risen significantly.
Second, there are industry-specific regulations that might influence the timeline of an acquisition, especially in highly regulated sectors such as HealthTech or FinTech. FinTech companies face stringent regulations related to consumer protection, anti-money laundering, know-your-customer requirements, and financial licensing. Changes in financial regulations or pending regulatory actions are likely to impact the timing of a sale, because these changes can affect your company valuation, ability to complete a sale, the time needed for additional audits and approvals, or even because adjustments to the business model or your company’s operations are needed.
Another factor to consider is IP policies and regulations, especially if your company’s value is heavily dependent on its intellectual property. As a founder, you may want to consider the timing of a sale based on changes in IP regulations or pending litigation that could impact your company’s IP portfolio.
Beyond Balance Sheets
Naturally, the personal circumstances and reasons of you as a founder will influence your perception of the “right” timing. Serial founders typically build a company with the intention of selling them quickly and moving on to new ventures. Therefore, their pressure to sell will also very likely influence the timeline. Besides the serial entrepreneur, many other founders will experience a turning point when they feel prepared to take on new challenges or simply become bored with their current company. Occasionally, personal reasons such as starting a family or experiencing difficulties with co-founders can also lead to the sale of a company.
Summary
Navigating the timing of selling your company involves a nuanced consideration of various factors. Firstly, it’s crucial to continually evaluate whether your growth trajectory has reached its pinnacle, maximizing your company’s valuation potential. Secondly, industry saturation levels and the broader macroeconomic landscape play pivotal roles in determining the opportune moment to sell. Additionally, industry dynamics, including competition and consolidation trends, may signal that the time to sell is ripe. Moreover, legal and regulatory factors can significantly impact transaction timelines and the attractiveness of your company to potential buyers. Lastly, your personal goals and circumstances as a founder inevitably influence the timing decision. While some factors are within your control and others are not, it’s essential to monitor and reassess all elements to ensure optimal alignment for maximizing the value of your venture’s sale.
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Tech M&A advisor with a background in venture capital and international M&A, and an academic track record as a published researcher and speaker in Europe.
