Is Now The Right Time?

Inevitably, at some point during an initial meeting with a business owner, the question, “Is now a good time for me to sell my business?”, is raised.  Obviously, this is a key factor in deciding to sell a business, or to even start the process of planning to sell a business, but it is not the only factor.

In fact, if a business is properly priced and marketed correctly, a business will sell and therefore, it can always be a good time to sell a business.  But there are other factors to consider, if a business owner wants to maximize the sales price and ensure a seamless transition.  The role of an effective M&A Advisor is to educate the business owner on the market conditions as well as the many factors that can influence a decision to sell a business.

Macroeconomic Factors – At the highest level, there are factors that occur that can affect local conditions – think how local gas prices are affected by what is happening in Europe.  These are called “Macroeconomic Factors” and there are some that impact the market conditions for selling and buying businesses.  Currently, it is truly a Seller’s market.

The first, and probably the most important factor, is that there is a tremendous amount of money in the market that is looking to acquire businesses.  These include Private Equity/Joint Venture money that is looking to buy businesses with the goal of selling them in several years or doing a rollup of smaller companies within an industry to build a bigger company.  This also includes companies looking to expand geographically or individuals looking to buy a business for their families.  This is a continuum from the last few years of relaxed Federal monetary policy, and we see no changes coming for 2022.

The second is a pending increase in the Capital Gains tax rates.  This was a major platform message in the most recent presidential election and a hot topic in 2021.  While it seems to have been moved to a bit of the back burner currently, it is fair to say that we will not see any lower rates than we do today.  For business owners, this is key as only a 5% increase in rates (and they are proposing higher) can seriously affect what is realized after a sale.  If an owner has a business that sells for $1 million dollars, who would like to lose $50,000 just because of the timing?  The business owners we work with have worked too hard and too long to lose that much money with the stroke of a pen.

The third is that the Banks are still lending at favorable rates and encouraging small business (SBA) loans to make it easier to secure the necessary funds.  While Fed Chair Jerome Powell has stated the intent to raise interest rates to curb inflation, a gradual increase in rates will not send buyers heading for the hills, but will be a factor into their ROI calculation on a prospective business.

Business Health – If you have a healthy, profitable, business, you will have buyers for your business.  If you have a very healthy business in terms of recurring revenues, profitability, a stable workforce and high customer satisfaction, you will have even more buyers for your business.  Additionally, a financially healthy business in terms of revenues and profitability can weather interest rate increases or other economic conditions.  We saw this throughout COVID.  While the news reported doom and gloom for local and mid-sized business, the majority of our clients, which are squarely in this size, had great results during the pandemic.  Their business foundation was solid and they were able to pivot to meet the changes thrust upon them.  Buyers are smart, they recognize this and will pay for it.

Business Worth – Asking non-qualified M&A professional their opinion of “how much is my business worth” is like someone asking “how pretty am I or how do you like my outfit?”.  You may get a great response that makes you feel good, but is it the truth?

Unfortunately, when a business owner starts the process of considering the potential sale of your business, there are people that will tell you what you want to hear without any fact-based data to back it up or the ethical backbone to tell you that maybe the green outfit is a little tight and not your color.  When you are seriously ready to start planning for an exit, you need a professional advisor who will tell you the truth, has a proven process and the experience to get the job done.  You don’t need another friend that tells you that your outfit is perfect.  We strongly believe that the first step in the planning process is to have a professional business valuation done by a M&A firm with a proven process and the final report issued by a third party, independent, business valuation firm.  This last part is critical as the independent, third-party valuation firm looks at the business from multiple views – Assets and Income and Market – it’s not just an opinion.   Different businesses have different types of Assets and Income results, which is typical and weighted accordingly during the valuation process.  This market lens is critical as it looks at what other similar businesses have sold for over the last several years (think about it loosely as a “comp”).  What the owner will get back is a multi-dimensional view of the business that includes Fair Market Value, marketability, potential deal structures as well as how it would be viewed in terms of ROI for a prospective buyer.

Don’t go at it alone – A business owner entering discussions with a prospective buyer often times result in a few potential outcomes.  They will leave money on the table as they did not know the value of the business before they committed to start the selling process and have little negotiation leverage in the process.  We have seen this endless times and the business owner suffers from “Seller’s remorse” for a long time after they sell the business.

Another scenario is the due diligence process drags on for an unnecessary length of time.  Often times this is done strategically by the prospective buyer as a tactic to wear down the business owner to get a lower price or more favorable terms.  Finally, there is the potential breach of confidentiality that can occur with a loose process.  If it gets out in the market that a business is for sale, employees may look for other jobs, clients may seek other providers and competitors can act like sharks.  Having proper representation from start to finish protects the business owner and results in an efficient sale at maximum value.

Selling a business at maximum value is more complicated than just answering the question “what is my business worth”.  A professional M&A firm will take the time to educate the business owner on the market as well as take the time to learn about their business to guide them to a successful outcome.