“The euphoria of a bull market overshadows the dull drums of a bear market” is often heard in the investing community, but how true are these words in the middle market merger and acquisition business today? The desire of business owners to sell their companies for top dollar is a given, but it is often difficult to know when the merger and acquisition market is at or near its peak.
So, how does an owner know when is the right time to sell his or her business? Unlike other arenas, in the sale of a business many factors impact the decision as to the optimal time to sell. The following is a brief overview of some of the critical factors to consider:
Industry: Every industry segment has a life cycle. The life cycle of an industry often exceeds the life cycle of the individual business models that exist within each industry. The optimal time to sell is greatly impacted by competitive market forces (e.g. China), technological advances (manufacturing technologies, internet, etc.), and end user demand (e.g. no demand for typewriters). Be a student of your industry and the money factors impacting its movement.
Interest Rates: The ability to borrow capital from banks, financing companies, mezzanine capital sources and subordinated debt sources greatly impacts a buyer’s ability to purchase a business. Throughout history the lending markets have directly impacted the activity and pricing in the M&A market. The 2009 recession is the latest reference point to the impact that the credit markets has on M&A transaction volume and pricing.
Buyer Demand: The economics of supply and demand are often the most significant force impacting the right time to sell a business. Over the past several years an abundance of buyers have created a tremendous seller’s market. This over-supply of buyers has recently been enhanced by low interest rates and low capital gains tax rates. This translates into an outstanding environment to sell a business. The abundance of qualified buyers is primarily a result of the following three factors:
1. Private equity funds raised an unprecedented amount of funds and have an estimated $450 billion dollars of unused capital designated for acquisitions in the near-term. A majority of this capital is approaching the stage within their funds that they must invest the money or return it to their limited partners. (Don’t count on the money being returned.)
2. Corporate entrepreneurs continue to emerge in record numbers. These are successful corporate veterans that have decided to try their hand at business ownership either by choice or necessity. A seller must be very diligent in reviewing these types of buyers to ensure that they have the right risk tolerance and skills to be the “right” buyer, and that they have financing.
3. Lower cost of capital has enabled strong companies to strategically acquire undercapitalized or underperforming companies. Such buyers are often well-versed in their industry and are actively monitoring key competitors for acquisition. These buyers are often able to pay more for a company based on their lower cost of capital, lower desired equity returns (compared with VC’s), and their ability to remove operational costs due to the synergies between the combined entities.
Current supply and demand for middle-sized businesses can best be assessed by talking with financial intermediaries that specialize in buying and selling companies like yours. Other sources that can provide insight on current demand for companies are private equity firms with investments in your industry or from chief executives operating within your industry.
Company-Specific Performance and Outlook: Many businesses experienced a strong downturn in the recent recession, shed costs, and have come through stronger and leaner. Buyers care most about the most recent years when evaluating historical performance, so a loss, say, in 2009 is no longer a drag on value. Most important is the outlook for profitable growth, and that’s where many owners err. They wait until the roller coaster approaches the top (profit /growth slows) before beginning the sale process. Consulting with and hiring professionals with the knowledge and experience in these matters can ensure you make an informed and timely decision to sell.
State of Mind: As you have probably concluded by now the process of determining the proper time to sell is complex and has many factors that impact the decision. It requires a business owner to really study his market, industry and the current capital markets. This need to increase effort and diligence towards studying ones business unfortunately comes at a time when business owners considering business transition want to pull back and slow down. Slowing down unfortunately is not an answer. Utilize professional advisors to supply perspective and needed efforts to optimize the timing of your sale.