It is no secret that the recent economic conditions have had a significant impact on most privately-held businesses over the past year or to. Not surprisingly, these same challenging economic conditions have also had a negative impact on merger and acquisition (M&A) activity. Thankfully, many privately-held businesses are beginning to see stabilization within their industries if not the beginning of a slow recovery. As a result, M&A activity appears to be on the rise. This is a good sign for all business owners, but particularly for those who are contemplating retirement in the next few years. Even so, there are a number of factors that impact the structure, timing, and valuation of a business sale. This includes the quality of the business, the number of qualified buyers, and the availability of financing.
Business quality – The quality of a business is still a key factor for attracting buyers. Now more than ever, acquirers are attracted to profitable companies with strong gross margins, loyal customers, tenured employees/management and attractive growth potential.
Many companies have been cutting costs to improve profits, but cost cutting has its limits. Once costs are optimized revenue growth is going to be the engine that impacts profitability. For example, we have seen businesses that have maintained their customer base over the past couple of years and have even gained new customers. Although their overall revenue and average revenue per customer is down from previous years, it is expected that the pent up demand from these customers will have a significant impact on future profitability as the economic environment improves.
Availability of qualified buyers – Some prospective acquirers perceive the current economic climate as an opportunity to expand or diversify their own business. And while some business owners believe that the only buyers right now are bottom feeders, this is definitely not the case. EBITDA multiples have decreased somewhat since 2007 according; however, strong companies are still being fully priced – because the demand for high-performing companies is definitely higher than the supply. In our own practice, we are currently negotiating deals that have multiple interested buyers.
In addition, private equity groups have cash to spend and are looking for opportunities. The amount of capital available for investment from U.S. private equity groups is at an all-time high with a gap of $400 billion between the amount of funds raised over the past few years and the equity invested.
Finally, some companies/industries have become even more attractive because they have proven their ability to perform well during the economic downturn. Health care, technology, and certain manufacturing companies are all enjoying this kind of increased attention.
Financing – Acquisition financing is more difficult to obtain than it was two years ago, but transactions are still getting done as lenders seek to finance deals that make sense. However, lenders are being more particular when it comes to approving buyers. They are looking for buyers who have relevant experience, a clear business plan and collateral assets.
Positive trends are important, and some lenders are interested in seeing a full-year on the books in 2010 – with improved performance over 2009 – before they will approve financing. In some cases, transactions may require more seller financing than was required in the past, so factor this into your planning. Even so, your goal should be to be substantially cashed out at closing.
The time to sell is when the business is steady or growing, the employee base and/or management team is stable and (perhaps most importantly) when an owner is ready based on his or her personal and financial objectives. This means sellers should understand what the market may be willing to pay for their business, and should plan ahead with a professional adviser to help determine the best time to sell.
Waiting a few years as the economy continues to recover is a valid strategy if the owners have a longer term retirement horizon. However, this may be an ideal time for planning an eventual sale. Business owners cannot control the external economic environment, so they should focus on the internal factors that can make a business more attractive. These factors include management succession, diversification of revenue, competitive or strategic advantages, opportunities for growth, asset base, and transparent financial records among others.
Trends are important when determining the right time to sell. If you do not have a system for tracking certain metrics and trends then this is a good time to implement one. Positive trends can demonstrate predictable or recurring revenue streams, and the ability to track such trends on a quarterly or even a monthly basis can be very valuable. The exact metrics to track depend on the type of business, but in general you should have the ability to track sources of revenue by customer, product/service and geography, as well as detailed costs and any other metrics that may be unique to your particular industry.
If you are contemplating a transition – structuring a buyout by employees, or selling it to a third party – you should be asking and answering a host of specific questions. In our experience, we have realized that planning ahead and following a well-executed process can increase the value of a business by 10-30%.
I invite you to contact us if you are interested in planning a future sale. Our conversation will be strictly confidential, and I am sure it will be worth your time.