Time to Sell
December 2018
There is a time for everything,
and a season for every activity … a time to plant and a time to harvest…
Timing is a critical determinant of success in mergers and acquisitions (M&A), influencing decisions at both strategic and operational levels for buyers and sellers alike. For entrepreneurs, venture capitalists, and private equity investors, a pivotal moment often arises when they must decide whether to sell a company or exit an investment. This decision is best made when the incremental risks and challenges to achieving further growth start to outweigh the potential rewards.
Market conditions, economic cycles, and industry dynamics all play a significant role in shaping the timing of an M&A transaction. During periods of economic expansion, favorable conditions such as heightened buyer confidence and strong valuations create a conducive environment for selling. Conversely, economic downturns often bring cautious buyers and declining valuations, making it critical to align deals with optimal market phases. Similarly, industry-specific factors—such as consolidation trends or the peak of a hype cycle in rapidly evolving sectors—can present windows of opportunity for achieving higher valuations or strategic premiums.
The performance and readiness of the selling company are equally pivotal. Businesses should ideally seek to transact when they are performing well, as this enhances attractiveness to buyers and maximizes valuation. Delaying too long, especially if performance declines, can erode value. Competitive dynamics also influence timing; when peers are acquired, it can trigger a sense of urgency in the market, creating an advantageous environment for proactive sellers.
Regulatory changes and tax laws add another layer of complexity, often prompting expedited deals to avoid unfavorable policy shifts. For buyers, the availability of low-cost financing and favorable capital markets can make acquisitions more feasible, while sellers can benefit from the increased pool of interested buyers and stronger valuations.
Internal milestones and personal factors further shape the timing equation. Strategic buyers may align acquisitions with growth objectives or market expansion plans, while private equity firms often face timing constraints tied to fund cycles. Sellers, on the other hand, may base their decisions on personal goals, such as retirement or the inability to scale the business further.
Ultimately, the art of timing in M&A lies in understanding and balancing these multifaceted factors to seize opportunities and achieve the best possible outcome for all parties involved.
Industry Dynamics and Competitive Pressures
Industry trends play a decisive role in determining the right time to exit. If dominant players are emerging and steadily eroding your market share, it may be time to consider selling. Many businesses fall into the "boiling frog" trap—believing their market knowledge and superior product will outlast larger competitors—only to be outspent in sales and marketing. E.g. for upper mid-market companies monitoring your return on invested capital (ROIC) quarter-over-quarter is crucial for maintaining objectivity. A declining trend should clearly indicate that it is time to consider selling before further erosion occurs.
Commoditization and First-Mover Advantage
The cost of starting software companies has decreased significantly, and technological commoditization often occurs within two to three years. If you were a first mover with substantial revenue (e.g., €20–30 million) and now face numerous competitors offering similar products, in a fragmented, slowing market, then selling early can be strategically advantageous. Being the first to market yourself to potential buyers can translate into stronger pricing leverage. Remember, in most technology sectors, there are typically only four to five serious buyers; being proactive increases your chances of securing an optimal deal.
Aging Technology and Competitive Disadvantages
If your core technology or stack is 8–10 years old and newer competitors are gaining a competitive edge, it might be time to exit. Without the resources to acquire or outpace these emerging players, holding on could result in declining relevance.
Peer Acquisitions and Defensive M&A
If a competitor in your space is acquired, it may be an opportune moment to think about selling. This isn’t merely a banker’s tactic but a defensive strategy to capitalise on increased buyer interest in the sector. Industries with a limited number of buyers often see a surge in activity following a high-profile acquisition, creating a window where your company can also gain attention.
Hype Cycles and Strategic Premiums
Operating in a sector at the peak of its hype cycle presents a unique opportunity to command a strategic premium. During these times, buyers often focus more on acquiring capabilities and technology than on revenue or cash flows. Companies that sell during the hype phase frequently achieve valuations much higher than they could a year later, even if their fundamentals remain unchanged.
Scaling Challenges and Resource Constraints
If scaling the business requires significant capital, resources, or effort that you are unwilling or unable to commit, it may be a signal to sell. The payback period for scaling investments might extend well beyond your retirement horizon or preferred exit timeline.
Fundraising Challenges
Difficulty in raising capital is another clear indicator. If existing investors are being asked to provide bridge funding to reach the next milestone, it’s worth evaluating whether a sale might be a more viable option.
Strategic Premium Offers
Occasionally, a buyer may emerge willing to pay a significant strategic premium for your business. When this happens, it’s worth serious consideration, as such opportunities can represent an extraordinary return on investment.
Succession Planning and Personal Circumstances
For family-owned businesses, particularly in markets like Germany, succession planning often drives exit decisions. First-generation founders of €50–100 million businesses may find that their children are unwilling or unable to take over, making a sale the logical next step.
Selling a business is as much about timing as it is about strategy. By remaining vigilant and objective, you can identify the right moment to exit, ensuring the best possible outcome for all stakeholders involved.