Selling a Business in a High Interest Rate Environment: 6 Tips Business Owners Need to Know

By David Karp, Co-Founder and Senior Managing Director

Is now the time to sell?

In any economic environment, that question requires deep and careful planning and consideration by business owners who are contemplating a business exit strategy. With interest rates at elevated levels, that question takes on even greater significance today, with many business owners wondering whether now is the right time to sell.

The reality is there is no “best time” to sell a business (unless you are in an incredibly “hot” area like artificial intelligence today, where valuations are at “nosebleed” levels). However, for business owners who take the time to position their businesses to be as attractive as possible to potential buyers, the current environment can indeed be a great time to sell. The bottom line is there are always buyers for great businesses.

Should I Sell My Business?

First and foremost, it is critical to identify the “why” behind your interest in selling. Ask yourself, “Why am I considering selling? Do I have to or do I want to? Am I just tired? Is it simply “time”? Is my industry in favor, with attractive valuations? Am I operating from a position of strength or weakness?”

Have an honest dialogue with yourself (as well as your trusted advisors, family, and possibly key employees) about those questions. After you’ve done so, assuming the answers to those questions reinforce that now is indeed the right time to sell, the following six considerations are key to a successful exit:

6 Tips to Successfully Sell Your Business Amidst High Interest Rates

1. The highest offer is not always the best offer

Yes, you want to receive the best possible sale price for the business you’ve poured your blood, sweat, and tears into. After all, this is the monetization of your life’s work, but it’s about more than just the price. Selling a business is a highly nuanced experience, and there are a multitude of factors to consider besides the offer price. For example, what is the probability of a close? A potential buyer might come to the table with an attractive offer, but if the deal is unlikely to close, it’s probably not worth the effort. Is the deal contingent on financing? If so, any “hiccup” can lead to a re-trade, or renegotiation of the agreed-upon purchase price.

Also consider culture. Does the buyer represent a good cultural fit for your firm and team? When it’s the right fit, the entire process can go more smoothly and the chances for long-term success go up. You might choose to take a slightly lower sale price if you can keep your team and organizational culture intact.

If working with a financial buyer (versus a strategic), know that an offer is typically based on a financial model that, if the financials are to temporarily “stumble,” the model could very well crumble along with any deal.

2. Do everything you can to enhance your business’s attractiveness

It should go without saying that prior to a sale (usually months if not years in advance), a business owner should do everything possible to boost the financial performance of the company. Double down on your financial “hygiene” and make sure you have clean and transparent financials. Do your financials make sense to a potential buyer? Ensure they do. A seasoned buyer will start with the “footnotes” in the financials and work backwards from there. Good financial hygiene makes for an easier transaction in the end.  

Also, potential buyers will be most interested in companies with a strong market position, competitive advantages, and a clear growth trajectory. Demonstrating a company’s strong market position, uniqueness, and resilience can help counter any buyer concerns about economic headwinds and other uncertainties.

If applicable, consider strategic debt management / reduction to improve the financial profile of your business and reduce the impact of rising borrowing costs for potential buyers.

Related Article: 6 Things Business Owners Wish They Knew Before Selling

3. Broaden the buyer pool

Look for buyers interested beyond financial performance

Make sure you are casting as wide a net as possible for potential buyers. A highly qualified banker with deep experience in your industry and who knows the major players in your market will be key in making that happen. Working with your banker, consider engaging with strategic buyers who might value your business for reasons beyond just financial performance, such as access to new markets or complementary product lines and other synergies. In high interest rate environments, strategic buyers will often pay the most. Working with strategic buyers can also help avoid the financial model “implosion” scenario I reference above that can happen with financial buyers.

Offer seller financing options with attractive terms

To broaden the pool of potential buyers, consider offering seller financing options with attractive terms. Doing so can make a deal more accessible for buyers who are facing tighter financing options from traditional lenders. This can also result in a buyer acquiring your business at a higher valuation / price.

Break down your business into smaller pieces for acquisition

If feasible,consider breaking down your business into smaller, more manageable pieces for acquisition by smaller companies with potentially less stringent financing needs.

4. Explore multiple valuation strategies

Now, how to get the best possible valuation and sale price for your business?Begin by emphasizing current industry valuation metrics as a baseline to start negotiations. That will provide a fair and transparent starting point for both parties.

Next, show the uniqueness of your business and its differentiating factors, as well as the long-term potential of your business beyond the current economic climate. The goal is to convey that waiting to make a deal could cost the buyer more in the long run, or even lose it to a competitor, so it is best to get the deal done today (on terms that are most favorable).

Working with your team of advisors, explore creative deal structures like earn-outs that tie the purchase price to future performance, potentially mitigating valuation concerns for buyers.

Related Article: CEO Founders: A 10-Point Checklist For Selling Your Business

5. Consider a partial sale or minority transaction

If liquidity and / or stewardship to assist with growth is what you seek, selling a portion of your business now can provide a “second bite of the apple” down the road, hopefully at a greater enterprise value. Selling a minority stake in your business allows you to maintain control, but with an investor who can provide liquidity and hopefully additional insights and expertise. An M&A professional and fiduciary advisor can help you explore what makes sense for you based on your goals and objectives. Being open-minded increases the probability of getting a deal done that is a win for all.

6. Lean on professional support throughout the sale process

Do NOT attempt to go this alone. There is simply too much riding on what will likely be one of the most, if not the most, important financial decisions of your life. Engage experienced M&A advisors who can navigate the complexities of selling in a high interest rate environment, as well as identify a large and diverse pool of suitable buyers. Develop a compensation structure for their services that creates the right incentives. It is critical to know what is most important to you and work backward from there. Is it cash up front that you seek? Total enterprise value? A quick and timely process? Here more so than ever, you will find that incentives drive outcomes.

While not all bankers are worth the fees they charge, those that are, are worth many, many multiples of their fee. They can help “package” your business, deal with any surprises, frame the value, and manage the inevitable “curve balls” that happen with every deal. In my experience, complicated deals where a banker is avoided simply due to the fee have typically yielded suboptimal outcomes. Avoid that fate.

In coordination with an experienced banker, work with a trusted fiduciary financial advisor. The right advisor can help ensure that you achieve your goals financially and that the sale of your business supports your vision for your wealth for potentially generations to come. 

Finally,ensure you have strong legal and tax counsel to structure a deal that is favorable for you and minimizes tax implications.

Communication and transparency throughout the process is critical, as they are key to building trust with potential buyers and achieving an outcome that all parties will be happy with. It also may give buyers confidence in your business should things not go as planned during the process.

In Summary

By implementing the strategies above, you can increase your chances of finding a qualified buyer and achieving a successful sale for your business, even in a high interest rate environment.

Contact us to explore whether now is the time to sell your business.