Part Four: What is the Current Status of the Merger and Acquisition Market?
As we discussed in the last three articles, it is important to take into account personal motives and objective conditions when you are trying to determine the best time to sell your business. For owners who toil long and hard to overcome the endless challenges that test the survival and success of their businesses, the thought of someday selling out for a lot of money seems, at best, a pipe dream.
A typical business owner in this situation may think, “Who would want to buy my business?”
As many owners have discovered, the merger and acquisition (M&A) marketplace can be receptive to acquiring privately owned businesses—maybe even businesses like yours. In some niches, even smaller businesses are able to sell to much larger cash buyers. But the market can be fickle. A number of factors can fuel or damper the “buying and selling” mania. These can include:
•The current state of the economy. A healthy economy tends to encourage investor confidence and a greater willingness to put money in otherwise illiquid businesses. A stagnant or contracting economy can depress valuation, thereby creating favorable conditions for a buyer’s market.
•Fluctuating interest rates. Low, stable interest rates can provide buyers with inexpensive funds to buy your business. Climbing interest rates can increase acquisition costs and dampen buyer enthusiasm.
•Availability and pricing of financing. The availability and cost of financing can directly impact deal activity. When financing is readily available to buyers at attractive rates, deal activity can become frenzied because buyers can leverage their equity investment. This means they could pay more for businesses and this is the point in the M&A cycle when it may be favorable for owners to be poised to sell their businesses.
•Corporate earnings overall and in the industry. Strong earnings can provide cash and the tendency for future cash availability; weak earnings tend to portend the opposite.
•Stock market value. To keep corporate earnings ever-increasing, it can make sense for publicly owned companies to acquire closely held companies with price/earning ratios lower than the acquiring company’s. Much of the difference in the multiples of publicly owned versus privately owned companies are due to differences in size.
•M&A currency. When publicly owned stock is trading at high earnings multiples, it makes sense for those companies to use their stock for acquisitions. As the stock market contracts in value, it can be a reasonable expectation for a chilling effect on the M&A marketplace.
•Supply and Demand. According to a Big Four CPA firm website in 2010, “71 percent of small to midsize business owners plan to exit within the next 10 years (2010-2020).” Practically all sellers in the next 5 to 10 years will be baby boomers (born in or before 1965). There are many more baby boomers than any other generation before or after. According to Inc. Magazine, “this movement will result in a glut of companies on the market driving down valuation and giving new leverage to buyers.”
Due to demographics and the law of supply and demand, it may be becoming more a “buyer’s market.” Therefore, if you are personally ready to sell and your business is ready for sale, there may be opportunities in selling your business now and potential dangers if you delay.
It is important for owners to be constantly aware of the condition of the M&A market, and the M&A market in their industry for companies of their size. Usually, transaction intermediaries serving your industry can best advise you. If the M&A market for your business is healthy, you may have the opportunity to adjust your personal timetables to take advantage of it.
When the M&A market is favorable (a lot of buyers offering high multiples), you need to recognize that adjusting your “ideal” departure date can be a whole lot easier than adjusting your financial needs. Conversely, when markets shut down, your personal goals may need to likewise adjust.
Whether you find yourself leaning toward selling your business now or in the future, today is a good time to begin creating a plan for preparing your business for your eventual exit. An experienced legal professional, in conjunction with your other advisors, can help guide you through the process of reviewing all of the factors associated with exiting your business and creating a comprehensive exit plan that addresses all of your personal and business objectives.
Article presented by Robert Norris, founder and managing partner of Wishart Norris law firm, a member of Business Enterprise Institute’s International Network of Exit Planning Professionals. © 2013 Business Enterprise Institute, Inc. Reprinted with permission. Wishart Norris law firm partners with owners of closely-held businesses to provide comprehensive legal services in all areas of business, tax, estate planning, exit planning, succession planning, purchases and sales of businesses, real estate, family law, and litigation. For more information, contact Robert Norris at 704-364-0010 or Robert.Norris@wnhplaw.com.