Rob McLeod of Bigelow presents three clocks for deciding when to sell a business: the Industry Clock (market conditions), the Company Clock (business performance), and the Owner-Manager Clock (personal readiness). The Industry Clock matters most because it sets valuations. A precision machine components client waited three years for the industry to recover after oil prices crashed before selling.
Hi, I'm Rob McLeod with Bigelow. Our practice at Bigelow helps owner-managers work through two questions: How do I build value in my business? And how do I capture that enterprise value someday? One of the items that always comes up in our discussions with our client is, when is it time to consider capturing the value that you've built in your business. We call this the question of timing. And so the question for you is, what time is it really for you right now? What time is it for your company? What time is it in your industry? We've created 3 clocks: the industry clock, the company clock, and the owner-manager clock. And we move the hands around to describe whether timing is good or not. Midnight is the best timing, 12 o'clock. 6 o'clock, not very good timing. Bad valuations, Level of activity low, not a great time to think about a transaction. And 9 o'clock would be pretty decent timing. We think it's helpful to actually separate the concept of timing into these 3 individual clocks because the drivers are different. And only when we look at all 3 clocks in concert do we figure out what is the overall best timing for an owner-manager. The first clock is the industry clock. What we're really driving at there is, is your industry in or out of favor? Are there positive drivers for your industry? Is there a lot of activity with investors? Are valuations high? The industry goes in and out of favor, and the question is, where are you in that cycle? Let's look at the second clock, the company clock. This clock is all about how's your company doing? Are you growing? Are you at record earnings? Do you have margin profiles that validate the value that you're giving to your customers and validate the intrinsic value of your brand and your business? What is the industry asking your company to become? The third clock is the owner-manager clock. This might be the one that you're most familiar with. This is a clock about how much runway do you, as the owner-manager and the leader of your business, have left? Would you like to be free from your current role in the next 2 years, in the next 5 years? Are you enjoying what you're doing today? Would you wish that you had a different role in the company or outside of the company? Maybe it's not just you that's at stake, but some of your family members if you have a family business. Are you taking enough risk in the business today, given what the company needs in light of the industry landscape? So, couple observations because we've been using this framework with owner-managers for several years. The first is this: everybody asks us, "Well, which clock is the most important?" Just because there's 3 clocks, which one do you guys care about the most? We've done a lot of thinking on this. We unquestionably think that the most important clock is the industry clock. It's when there's going to be a lot of investors, they're enthusiastic about your industry, valuation and activity are high. We had a great client who made precision machine components for a whole host of end markets, but their largest was oil and gas. We were talking to investors, we had a lot of interest. The guy had a fabulous company. Unfortunately, the price of oil was cut in half in the 3 months that we were in dialogue with certain investors. At that point in the cycle, there was no buyers at reasonable valuations, not even coming close to the intrinsic value of his company. We had to wait, put the process on hold, let the industry come back. We ended up performing a transaction about 3 years later, once the industry clock came back into fashion. So I tell you this because in the industry clock, when you pass midnight, you drop incredibly fast to 6 o'clock. Clock, and you never know when midnight is until it's over. Brings me to my second observation, which is key. The goal is you cannot try to perfectly time all of these clocks. Frankly, the goal is not perfection, it is good timing. And what we mean by good timing would be in the top quadrant between 9 o'clock and midnight. If we could get all 3 clocks to line up in that frame, wouldn't that be great? So the next time someone asks you, "What time is it?" you have a lot more to think about. We hope you found this framework helpful. If you're interested in seeing other creative IP that Bigelow has created to help owner-managers, feel free to visit bigelowllc.com and click on our EOM resource library.
