As a business owner experiencing growth, you’ve likely been asked if you’d consider selling. With growth underway, it’s natural to wonder, “Why would I sell now?” It seems counterintuitive: you’re expanding, and the future looks bright. But if there’s interest, if an opportunity to sell during a growth phase is on the table, is holding onto the business truly the best choice? Let’s explore why waiting for the “perfect time” to sell might not only lead to missed opportunities but could also increase risks.
While this perspective aligns with buyer interests, it’s equally valuable for sellers looking to maximise their business potential. We know a lot of business owners that in hindsight would love to go back to a time when they had the opportunity to sell their growing business and chose to hold. I will aim to provide some perspective for the reasons throughout the article.
In summary we will cover the following:
- Selling during growth often leads to higher valuation
- Delaying a sale introduces risks like economic shifts or declining profits
- Earnouts can mitigate risks and align interests
The Role of Growth in Business Valuation
Growth is appealing to buyers and plays a crucial role in maximising business value, often driving a higher valuation. The logic is straightforward: buyers pay a premium for a growing business because the return on their investment is quicker when profits increase rapidly.
That said, two key considerations impact the valuation of growth. First, buyers are interested in future growth, not just past or current trends. Your historical and present growth have brought you this far, but if it’s unlikely to continue after a sale, a buyer won’t pay for that growth potential.
Second, there’s a distinction between revenue and profit growth. Revenue growth alone, without corresponding profit or free cash flow increases, doesn’t necessarily add value. High revenue growth can strain cash flow if working capital needs surge due to increased inventory or higher receivables. In cases where sales growth doesn’t lead to more cash flow, the valuation may not benefit from revenue growth alone.
According to EY’s Australian SME Transaction Report, weak cash conversion can reduce valuation multiples by as much as 15%, even with rising revenue. If growth isn’t translating into cash, the business’s perceived value diminishes.
Managing Risk When Selling During Growth
Business buyers weigh two factors: risk and return. We’ve touched on how growth influences return, but what about risk?
Risk is often a measure of uncertainty—the greater the uncertainty, the higher the perceived risk. High revenue growth can add volatility, especially when it’s accompanied by demand fluctuations, capacity constraints, or supply chain issues. Buyers prefer long periods of steady growth over short bursts of high growth because the latter often implies volatility, with profits potentially moving downward as quickly as they rise.
One way to mitigate this uncertainty is through earnout agreements, which can be a strategic tool for both buyers and sellers. Although structured by buyers to offset risk, an earnout also lets sellers benefit from future growth after the business is sold. The higher the profit growth, the greater the earnout payment. Despite reservations about earnouts, when structured well, they align buyer and seller interests, ensuring both benefit from continued profitability. Earnouts don’t just benefit buyers, it’s common for businesses to perform better over the earnout phase due to new ideas, operational improvements, and fresh capital. An earnout lets you benefit from future performance without carrying ownership risk.
(A word on earnouts: always speak to other people that have sold businesses to the buyer that is acquiring yours to see how the buyer behaved after the transaction was done. At PieLAB we have an excellent track record of paying big upsides to sellers during earnouts, and we’re always very happy to prove that by introducing you to people whose business we’ve acquired)
Timing the Market vs. Mitigating Risks
If we agree that profit growth enhances valuation, we must also accept that stagnant or declining profits have the opposite effect. Holding onto the business through every growth phase could eventually lead to a decline in value.
During growth, the desire to “stay in the game” is strong, but it can blind owners to the risks of holding on too long. Many wait for the “perfect moment” to sell, but that delay can invite unpredictable risks. Economic shifts, industry disruptions (such as AI), or unforeseen events like the COVID-19 pandemic can sharply impact business value, influencing Australian business exit options.
Market timing is tricky. Growth today is attractive, but holding out for a better deal introduces risks beyond your control.
Addressing Emotional Barriers to Selling
Psychological factors often play a significant role in holding onto a business. Two powerful forces at work are the endowment effect (overvaluing the business simply because you own it) and loss aversion (the fear of missed opportunities). Recognising these biases can help owners make a more balanced decision.
Why PieLAB Prioritises Transparent and Smooth Transitions
Selling during growth may seem counterintuitive, but waiting for the “perfect time” can introduce risks that outweigh potential rewards. Selling while growing allows you to capitalize on the value you’ve created, share in future success, and reduce uncertainties.
In the end, buyers pay for future outcomes, not just past achievements. Understanding the psychological factors in play and considering mechanisms like earnouts allows you to make a decision that leverages today’s growth without compromising tomorrow’s potential.
At PieLAB, we’ve built a reputation on trust, transparency, and keeping our word. The decision to sell should be part of a well-planned exit strategy for business owners, ensuring it’s mutually beneficial, honours the business’s legacy, and supports its employees. We’re confident in our approach and would be happy to connect you with past sellers who can speak to our commitment. Their stories highlight how we prioritise a smooth transition, uphold the culture of the business, and deliver on every promise we make. For us, it’s not just about the acquisition; it’s about preserving what you’ve built.
