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Timing Your Exit

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Author: Paul Cronin - Apr 2015

When business owners are asked what are the top three things they want from their business at the point of transition

  • 50% say to “maximize the value” of their business;
  • 40.4% say to “minimize taxes” and
  • 38.7% say “to maintain control” over when and how they will exit their business.

There are a number of important activities an owner can take to maximize business value and maintain control over how and when they exit. The first [and most important] is to create an actionable plan and to communicate that plan to their advisors and leadership team. The second is business value creation and the third is market timing. The subject of this article is market timing. (Of course, if you do not plan your transition, the knowledge of marketing timing becomes irrelevant.)

The ability to predict long term is essential to maximizing your business value at the time of sale. Staying abreast of the times through research, trend analysis, and asking questions of knowledgeable experts can earn you millions more when you choose to cash in. Too many business owners are inwardly focused, lack market awareness or put too much credibility on gut instincts. Survey results indicate business owners have not performed well when exiting their business. In fact, fewer than 40% of owners claim to have successfully transitioned their business. Only one in ten owners received anywhere near the value they expected.

A Reliable Tool for Predicting and Planning

The 10-year transfer cycle theory* is a reliable tool for predicting economic business cycles. This theory states the US economy follows a predictable, 10-year economic cycle. Beginning in the 3rd year of any decade the economy begins to strengthen and reaches its peak in the 7th year of the decade. This time period is the “sellers’ market”. This five year positive growth cycle is subsequently followed by economic decline, beginning in the 8th year of the decade and lasting to the turn of the decade. This is the “neutral market”. Year one to year three of the following decade is what is referred to as the deal recession, or buyers’ market. These cycles are consistent. The degree and speed of growth and decline varies (for example in 2009 the economy fell off a cliff). This cycle has been repeating consistently for decades.

Research Substantiates the Tool

In the March 2015 newsletter from ITR** a reader asked whether or not it is a good time to expand their facilities and how they should be thinking of other long term strategic moves.

“Jim Chappelow, an economist at ITR Economics, answered, “Thanks for your question. We expect 2016-2017 to really be the last, strong boom in the US economy for some time. By late 2018 and heading into 2019 we see downside risk of a recession, somewhere on the order of the 2001 negative cycle…”

ITR simply confirms the 10-year transfer cycle by pointing out that “2017 will be the last strong year of growth for some time”. Economic slowing will begin in the 8th year of the decade and will not recover until the 3rd year of the following decade.

Conclusion

“Timing” the sale of your business is one of the most important dynamics business owners must understand and execute to get what they want from their business, when they want it.

All boats rise and fall with the tide. The 10-year transfer cycle explains the tide and its timing. If you want to maximize the value of your business, you want to sell when the tide is high. High tide will end in 2017.

You only have one chance to exit your business and maximize its value. Commit to doing it right and be one of the 10% who got what they wanted from their business when they wanted it.

*The 10-year transfer cycle was made know by Rob Slee, in his seminal book on finance for private companies, “Private Capital Markets”.

**ITR is the leader in applying business cycle research to formulate practical business decisions. They claim a 94.7% accuracy score over six decades.

 

About the Author: RFB Business Advisor, Paul Cronin, is a leader in strategic execution, exit and transition strategy, and succession planning. He specializes in working with owners and their leadership teams to create, grow and preserve wealth. Connect with Paul and other RFB® Business Development Advisors here, or on LinkedIn.

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