{"id":1158,"date":"2012-12-04T07:49:55","date_gmt":"2012-12-04T12:49:55","guid":{"rendered":"http:\/\/www.changinglanes.biz\/?p=1158"},"modified":"2016-05-03T18:14:14","modified_gmt":"2016-05-03T22:14:14","slug":"the-danger-of-market-timing-and-selling-your-business","status":"publish","type":"post","link":"https:\/\/www.changinglanes.biz\/index.php\/2012\/12\/04\/the-danger-of-market-timing-and-selling-your-business\/","title":{"rendered":"The Danger of Market Timing and Selling Your Business"},"content":{"rendered":"

The other day, I was speaking with a successful business owner in her late fifties who runs a retail operation with over 40\u00a0employees.\u00a0 Even though she was tired and feeling very burnt-out, she was planning to wait another three to five years before selling her business because she \u201cwanted to sell at the peak of the next<\/strong> economic cycle<\/span><\/em>.\u201d<\/p>\n

On the surface, her rationale seems to make sense. If you speak with mergers and acquisitions professionals, they\u2019ll tell you that an economic cycle can impact valuations by up to \u201ctwo turns,\u201d which means that a business selling for five times earnings at the peak of an economic cycle may go for as low as three times earnings at a low point in the economy.<\/p>\n

The problem is, when you sell your business, you have to do something with the money you receive, which usually means buying into another asset class that is being affected by the same economy.<\/em><\/strong><\/p>\n

Let\u2019s say, for example, you had a business generating $100,000 in pre-tax profit in an industry that trades between three times earnings and five times earnings, depending on the economic cycle.<\/p>\n

Now, let\u2019s imagine you sat stealthy on the sideline until the economy reached the absolute peak and sold your business for $500,000 (five times your pre-tax profit) in October 2007<\/strong>. You took your $500,000 and bought into a Dow Jones index fund when it was trading above 14,000. Eighteen months later \u2013 after the Dow Jones had dropped to 6,547.05\u2013 you\u2019d be left with less than half of your money.\u00a0 Even though you cleverly waited till the economic peak, by March 9, 2009<\/strong>, you would have effectively sold your business for less than 2.5 times earnings.<\/p>\n

The inverse is also true. Let\u2019s say you waited \u201ctoo long\u201d and sold the same business in March 2009. And because you were at the lowest possible point in the economic cycle, you only got three times earnings: $300,000. Notice that\u2019s 20% more than if you\u2019d sold at the peak and bought an index fund at the top of the market.<\/p>\n

Just like when you sell your house in a good real estate market, unless you\u2019re downsizing<\/em>, you usually buy into an equally frothy market<\/em><\/strong>. Which is why timing the sale of your business on external economic cycles is usually a waste of energy.<\/p>\n

External vs. internal economic cycles
\n<\/strong>
\nInstead, I\u2019d recommend timing the sale of your business when internal economic factors are all pointing in the right direction: employees are happy, revenue and profits are on an upward trend, and there is still lots of market share for an acquirer to capture.<\/em>\u00a0<\/strong>You can learn where your business is on the path to selling in any market by finding your Sellability Score – 13 minutes is all it takes – Get My Score<\/a>
\n<\/strong><\/a>
\nWhen internal economic factors are pointing up, you\u2019ll fetch a price at the top end of what the market is paying for businesses like yours right now, which means that \u2013 for good or bad \u2013 you get to use your newfound cash and buy into the same economic market.<\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

The other day, I was speaking with a successful business owner in her late fifties who runs a retail operation with over 40\u00a0employees.\u00a0 Even though she was tired and feeling very burnt-out, she was planning to wait another three to five years before selling her business because she \u201cwanted to sell at the peak of […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[11,29,28],"tags":[],"class_list":["post-1158","post","type-post","status-publish","format-standard","hentry","category-business-culture","category-economics","category-selling"],"_links":{"self":[{"href":"https:\/\/www.changinglanes.biz\/index.php\/wp-json\/wp\/v2\/posts\/1158","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.changinglanes.biz\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.changinglanes.biz\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.changinglanes.biz\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.changinglanes.biz\/index.php\/wp-json\/wp\/v2\/comments?post=1158"}],"version-history":[{"count":10,"href":"https:\/\/www.changinglanes.biz\/index.php\/wp-json\/wp\/v2\/posts\/1158\/revisions"}],"predecessor-version":[{"id":3201,"href":"https:\/\/www.changinglanes.biz\/index.php\/wp-json\/wp\/v2\/posts\/1158\/revisions\/3201"}],"wp:attachment":[{"href":"https:\/\/www.changinglanes.biz\/index.php\/wp-json\/wp\/v2\/media?parent=1158"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.changinglanes.biz\/index.php\/wp-json\/wp\/v2\/categories?post=1158"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.changinglanes.biz\/index.php\/wp-json\/wp\/v2\/tags?post=1158"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}