By Neil Seiden, Managing Director, Asset Enhancement Solutions, LLC
This is the first in a series of articles regarding Mergers & Acquisitions in the Middle Market. Asset Enhancement Solutions, LLC is committed to educating business owners and their trusted advisors on this topic as well as other pertinent issues that affect Middle Market companies.
Growing and running a company is challenging, invigorating, frustrating, but ultimately very rewarding. These emotions make selling the company you have built and nurtured one of the most difficult decisions a CEO has to make. Even more challenging, is deciding "when" to sell your company. A business owner should sell for the right reason, and at the right time. We have highlighted some of the key factors you should consider when deciding when to sell your company.
When considering when to sell your company, remember that it takes time to prepare your company for sale and that when you do start the structured sales process it could take 6 to 12 months before the transaction is closed. It is best to sell your company when you choose to decide, not when external factors force you to do so.
- You no longer have the passion
You used to have Fire in the Belly and the burning desire to grow and manage a successful company. Are you now happier being away from the business? Are you disenchanted and burnt out? When passion disappears, negativity can lead to a weaker organization and lower financial performance which can reduce the value of your business and make it more challenging to sell. Thus, it may be better to sell the business sooner than later to prevent the dissatisfaction from affecting your business for too long a period.
- You are unwilling to make the necessary investment in the business
To remain competitive or take the company to the next level requires a significant monetary investment and commitment from the entire organization.
- The company has outgrown your ability to manage it
Entrepreneurs are typically great at sales or product development. However, when a company reaches a critical mass it requires expertise and leadership skills that the founder does not often possess. Some entrepreneurs are not comfortable delegating and sharing responsibility even though the future success of the organization may depend upon it.
- Favorable market conditions in your industry
If you had to sell a company servicing the housing market during the Great Recession, you received a fraction of what your company might have been worth in 2005 and 2006. Today, the housing market is very strong and companies are selling at high multiples. Sell your business when market conditions for your industry are favorable.
- You are earning record profits
Many business owners are reluctant to sell when things are trending up, fearing they will be foregoing earnings that will be growing in the future. Prospective buyers prefer companies with increasing revenue and cash flow and are willing to pay a premium for consistent financial performance. Thus, it is better to sell when you are trending up, than when you are trending down.
- Your company is not performing well, but offers synergistic opportunities
Strategic buyers are often more interested in acquiring unique assets than cash flow. They seek new product lines, new technologies, different types of customers and markets. Thus, rather than waiting till the company is turned around; the company may still have significant value to the appropriate strategic buyer.
- Changing market trends are working against you
Without any fault of your own, certain mega-trends could adversely affect your business. Various internet related businesses have upended many established industries. Look at what Uber has done to the taxi industry, and Zappos to retail shoe stores. If you recognize that a major shift in your industry is imminent, and that you are unable to evolve your company to cope with the changing trend, it may be time to put a plan in place to exit the business.
- Increased regulatory environment
Complying with the increased regulatory environment has created challenges for companies in various industries. Many companies have either merged or sold to larger companies as a result of this environment.
- You have no obvious succession plan
You always thought that one day your children would take over the company. However, they pursued other careers and have no interest in taking over the business. You have a good management team, but no one possesses the full skill set or resources to take over the company. A sale of the business will insure your legacy continues and allow you to earn the financial rewards from all your years of hard work.
- Alignment of Favorable Economic Variables
It is very rare when key economic variables are all favorable at the same time! Fortunately for business owners, this favorable alignment of economic variables which started in 2013 has continued.
- Enormous amount of capital on the sidelines
Private Equity firms have approximately $500 billion of capital that must be put to use. When you add capital from Family Offices and other investors, there is approximately $1.2 trillion of funds seeking quality acquisitions. In addition, U.S. companies have more cash on hand today than any other time in history due to their efforts to improve their balance sheets during the Great Recession. Supply and demand dictates that as the cash available and demand for acquisitions increase, the multiples and price that will be paid for these businesses will increase.
- Current M & A environment
Middle Market M & A activity in 2014 was the strongest since 2007! According to PitchBook, there was an 18.3% increase in the number of deals that closed in 2014 compared to that of 2013 and the number of deals that closed in 2007 exceeds 2014 by only 3.7%. Activity for the first quarter of 2015 approximated that of 2014. Most experts agree that activity for 2015 will exceed that of 2014.
- Banks are lending again
Banks and other financial institutions are aggressively lending again and financing M & A transactions. This has contributed to making the past two years record years for M & A transactions.
- Historically low interest rates may be on the rise
Even with all the cash they have accumulated, Financial and Strategic buyers still like to leverage their acquisitions with debt. Janet Yellen, Chair of the Federal Reserve has indicated that interest rates will increase in 2015. As interest rates rise, it increases the cost of capital for buyers which will have a negative effect on multiples and selling prices. Rising interest rates also affect the profits you retain from your company. As it is inevitable that interest rates will increase, keep this is mind as you contemplate when to sell your business.
- Capital gain rates may be on the rise
The top rate on capital gains is currently 23.8%. The current economic and political environment is becoming more receptive to increased rates due to stressed federal and state budgets. The after-tax value of your business should be taken into account when considering when to sell your business.
- Timing the next recession
It has been six years since the last recession. Historically, ten years is the longest time period we have had between recessions. While you may be able to purchase a company on the cheap during a recession, you certainly do not want to sell your company during a recession! Chances are that a recession is on the horizon in the next few years, but the economists just don't know when.
- Timing the peak of the market
The economy continues to slowly trend upward since the end of the Great Recession. Both the economy and M & A activity in 2014 improved upon that of 2013, and 2015 thus far has improved over that of 2014. Companies have recorded record profits and have stronger balance sheets. Is it best to wait a few years and time the sale of your business when the market peaks? Timing the peak is very difficult, because to determine the peak, you need to know when the upward trend will end. And since economic data is usually published 6 to 12 months in arrears, you will not get to analyze the data until it is too late. For example, the National Bureau of Economic Research announced in September 2010 that the Great Recession ended in June 2009. Add to this time period, the 6 to 12 months it takes to sell a company using a structured sales process, it could be 2 years after the peak of the market that you actually close on the sale of your company. The passage of time brings uncertainty, and brings us closer to the next recession, higher interest rates, increased competition from more baby boomers selling their business and possibly higher tax rates. As timing the peak of the market can be risky, it is best to start the sales process when the economy and M & A activity are trending upward.
- Avoid competition from your fellow Baby Boomers
There is no question that the Baby Boomer generation has had significant impact on both society and the economy throughout their life cycle. Over the next 15 years, the last of this group will have reached age 65. Baby Boomers have created more businesses than any other generation, and in the coming years these companies will likely be put up for sale. Supply and demand dictates that as the supply of businesses for sale increases, the price that will be paid for these businesses will decrease. If you are thinking about selling your business, you may want to do it sooner than later before the market becomes too saturated.
Asset Enhancement Solutions, LLC ("AES"), is a financial advisory firm that provides both Investment Banking and Consulting Services to companies considering important transactions such as selling a company, acquiring a company and raising capital. AES with its strategic partners consult with business owners on various types of transactions and throughout all phases of the M & A process.
To learn more about how Asset Enhancement Solutions, LLC can assist you with your transaction, please contact:
Neil Seiden, Managing Director
Asset Enhancement Solutions, LLC