5 Signs the Time Is Right to Sell Your Company

Navidar | September 13, 2021

Founders and CEOs face many challenging decisions but knowing when to sell their company ranks among the most important. This raises the question: How do founders and CEOs know exactly when the timing is right for an M&A? Just as selling too soon can have negative financial implications, so can selling too late.

Based on Navidar’s vast experience advising companies on M&A transactions, here are five signs the timing is right to sell:

#1. The Category Leader Gets Acquired

When an industry leader is acquired, the entire category tends to consolidate within 12 to 24 months. This kicks off a game of musical chairs, with the goal being for the remaining companies to find a chair before the music stops. In other words, when an industry player is purchased, it leads to acquisitions of the remaining players in that industry.

Note that consolidation following the acquisition of an industry leader can occur quickly. For instance, Navidar assisted on the sale of the market leader in SaaS shipping solutions for e-commerce companies. Within 18 months, all other notable industry players had been acquired.

Founders and CEOs do not want their company to be the one left without a chair when the music stops playing. Potential buyers may not be interested in your business if they have already purchased one of your competitors. Prepare for such market consolidation now by making sure your company is visible to likely buyers through marketing, industry recognition, and thought leadership programs.

#2. Your Company Receives Unsolicited Inbound Acquisition Inquiries

An inbound inquiry usually starts with a request to “discuss a strategic partnership” or “explore how we can work together.” When such calls come from large companies with an acquisition history, it is good to have a consistent set of questions to ask in order to gauge their seriousness and knowledge level.

Navidar has been hired by numerous companies after they received such inquiries and determined in consultation with us that they were indeed serious probes.

Be aware that in addition to strategic acquirers, there are also financial buyers. These are usually private-equity firms, many of which have extensive outbound calling efforts to identify and source potential investment opportunities.

With financial buyers, it is prudent to assume that such prospecting efforts do not necessarily signify a deep interest in your company, since they make calls to hundreds of companies each year. However, also remember that financial buyers are very active acquirers and control large pools of capital with which to invest in or acquire companies, and so their calls should also be taken seriously.

Receiving a call from a strategic buyer in an industry that aligns with yours is very likely a sign to consider engaging an M&A advisor. Receiving calls from multiple financial buyers may indicate the same thing, since the chances are higher that one may make an offer.

#3. Your Company Is at a Strategic Crossroads with Big Decisions Ahead

Many of Navidar’s M&A clients came to us on the brink of having to make strategic decisions that would have had a major impact on their company, such as whether a total rewrite of their product’s software would be required to maintain market competitiveness, whether to dramatically boost sales and marketing expenditures, or whether to convert from a traditional software-licensing model to SaaS.

Such decisions are crucial since making them could push out the likelihood of being acquired for as much as four to five years and investments could be incurred immediately. The critical question is whether to assume the execution risk versus waiting for the return on investments to be realized over the next four to five years.

As a result, company leadership may often decide to explore M&A possibilities before making such large decisions, especially when they entail significant investments and there is uncertainty as to whether the action will ultimately pay off.

#4. A Major Shareholder Wants to Take Some Money Off the Table

After years of investing their time and sweat in their business, many founders, CEOs, or other major shareholders reach a point where they wish to de-risk their highly concentrated stock holdings and convert them to cash.

There are multiple ways to manage this process, many of which are not exclusive of each other. For instance, the founder could sell a small, non-controlling stake in the business to an outside investor (a minority investment), sell a controlling interest in the business to a financial partner while retaining some ownership (a majority recap), or sell all the company’s equity to a strategic or financial buyer.

Each of these options has advantages and drawbacks, so it is important to discuss them in depth with an investment banker. Regardless, if the founder or another major shareholder wants to monetize their equity stake, M&A is an important option to consider.

#5. Your Company Has a Dysfunctional Capital Structure

To be certain, capital raising is a challenge for most companies, and the timing, amount, and terms of the raise do not always go as planned. It is not unusual to see companies hamstrung with complex cap tables (equity and debt shareholder mix) reflecting the competing return targets and liquidity objectives of their various investors.

A common way this happens is when a company has been fortunate to raise capital on favorable terms only to later have to raise capital on worse terms after hitting an unexpected bump in the road in the form of slower growth, departure of key executives, or a negative industry development.

Such issues can lead to a dysfunctional capital structure, which can cause disruptions in the boardroom and even paralyze companies from taking any meaningful actions to enhance value. In these situations, exiting via M&A before the company is unable to make the expenditures it needs to continue its growth rate should be a serious consideration.

If you would like to discuss any of the scenarios described above, or if you are currently seeking advice on a potential M&A transaction, please contact Stephen Day at sday@navidar.com or (512)765-6973.