The optimal timing for an exit is influenced by many factors and is highly situational depending on the unique circumstances of each company. Influencing the optimum time for an exit are the lifecycle stage of the company, industry conditions, personal needs of the entrepreneur, desires of co-owners and investors, the regulatory environment, the broader economy, and the public and private capital markets.
Unforeseen circumstances may also arise prompting the need for an exit even if the timing is not optimal. Being prepared in advance can make a major difference in the eventual outcome and the range of exit options that might be available.
One thing is certain, however, and that is timing can have a huge impact on the purchase price for a company. Timing also influences the nature of deal structures and even if a deal can get closed. We only need to look back to 2009 to see what a difference a year can make. Alternatively, we can reference the newspaper and publishing industry to see how a relatively stable industry for many decades can unravel in just a few short years. Of course, timing works in the other direction, too. Companies in favorable industries that are growing can attract multiple suitors.
Getting prepared and being ready to do a transaction when the timing is judged to be right is sage advice. Having clear and well-defined personal and corporate objectives are also key in determining the optimal time for an exit. Three stars need to align for a successful transaction:
- The company and entrepreneur must be ready
- The company’s fundamentals must be sound
- The market must be ready
The “exitability” of a company is heavily influenced by the company’s potential to generate future cash flows in excess of what the company needs for operating expenses and ongoing investments in property, plant, and equipment. In simpler terms, it is the amount the company earns that is left over and can be distributed to the owners or reinvested in the company (or other ventures). The predictability of these earnings, and the extent to which these earnings can be protected from the competition well into the future, weighs heavily on a company’s exitability. The industry in which the company competes, the breadth of its markets, and the extent of customer concentration also weigh heavily. A company’s historical performance, past encumbrances, and degree of blemishes also influences a company’s exitability.