By Karl Edmunds – Director, SDR Ventures
The overall economy continues to experience one of the longest bull-market cycles of all time. Many pundits in the late 90s began to speculate that a recession or severe decline was no longer likely due to a unique set of market conditions. This blindness to market realities cost many business owners a fortune and, unfortunately, the same perspective is back today for too many investors.
For business owners who have a significant portion of their wealth still tied up in their business, this market blindness could be devastating. I hear business owners suggest that the market for selling their businesses is strong – with multiple buyers and no change in sight. Some say that capital is readily available to buyers from multiple sources, with no urgency to take action now.
My question to business owners in the lower middle market is: what will your situation look like if you are wrong? What will your options be if you face a market with no or few buyers, and business valuations in steep decline for multiple years? How would that affect your retirement plans?
Planning for an exit is critical and takes time, so my advice is: don’t delay if you are a business owner with a plan to sell in the next 18 months to 2 years. Please consider the following…
Financial Markets: The ability to borrow funds regardless of whether it is working capital, mezzanine debt, equipment purchases or capital to acquire a business will have a huge impact on the transaction activity in the M&A arena. It is highly likely that historically low rates will be rising. Be prepared for the potential impact that higher interest rates may have on your exit plan.
Your Industry Dynamics: Think about the life cycle in your industry and then consider the life cycle of your specific business. They are not necessarily the same. If your industry faces a downturn due to global conditions or local issues, the sale of your business could be impacted negatively. Staying tuned to market forces from global competitors, disruptive advances in technology, operations and user demand is a never-ending challenge.
Supply/Demand Demographics: A seller’s market has existed over the past couple of years due to a large buyer market supported by low capital costs and taxes. Private equity has almost unlimited funds to invest for the right opportunity. Large numbers of senior-level corporate executives are investing in businesses to prepare for retirement, in part due to poor executive employment prospects. Finally, many corporate operations are leveraging growth through strategic acquisitions given the low cost of funds. This highly advantageous sellers’ environment is not likely to last, so taking action now in preparing to exit may translate into substantial financial rewards.
High quality and experienced intermediary investment bankers are well positioned to offer valuable insights to business owners considering an exit plan. These insights typically include an overview of industry dynamics, market and transaction activities, business valuation trends and unique geographical demands. Some business owners fear that investment bankers might be too costly, but in my experience investment bankers almost always pay for themselves financially and almost certainly in time savings.
Value-Enhancing Strategies: Too many business owners fail to recognize the type of preparations needed prior to going to market for a sale. Some businesses have too much dependency on a single owner(s)’ individual relationship with customers, and some have poor financial records that need to be cleaned up to successfully navigate the due-diligence process. Still others have historical performance issues that must be addressed to enhance valuation and deal with suboptimal organization/personnel issues. Properly addressing issues takes time and must be done to enhance the value of the business to the marketplace. Hiring professional expertise to guide this process is a good investment and will improve the probability of a successful go-to-market process.
Get Your Head in the Game Now: You have started and successfully built a strong and growing business. Making mistakes with exit plans can be devastating and, unfortunately, happens all too frequently. Running the business is not the same as preparing to exit, and engaging the right resources to sell is one of the most important decisions you will make. You will need to look at your business, industry, competitors and geography in ways you that you may have never considered. This is not the time to slow down and think that deferring action will work out. Start a conversation now with an advisory team so you are prepared for a successful exit, and then take action.