By Gary Miller – Managing Director, Consulting Division, SDR Ventures
Over the past several months, a number of business owners have told me that they are ready to sell, but haven’t “pulled the trigger.” Most think that, if they wait, their business valuations will continue to increase. But they are gambling at best.
There is much talk about the strength of the current seller’s market over the next six to 12 months. Most qualified mergers and acquisitions advisers will tell you that you need to maximize the value of your business to receive the highest price with the best terms and conditions. Three factors – business optimization, exit planning and the state of the capital markets – significantly affect the value of your business.
- Business optimization. Generating attractive future earnings streams for the business is critical. Various performance drivers (strategic business plans, management bench strength, sales, competitive positioning, marketing, operations, financials, intellectual property and market share) impact the buyer’s investment risk. An M&A consultant can identify what needs to be done to optimize each of the internal factors.
- Exit planning. Focus on how satisfied the seller will be after the transaction closes. If you are willing to sell now, plan what your life will look like after the sale. To help you think through your future, hire an M&A consultant to help you establish your life’s goals and exit plans, and prepare your company for sale before you sell. Once your goals, exit plans and company is ready to go to market, hire a knowledgeable wealth planning team to help you with estate, tax and wealth management plans that conform to your exit strategy. Your wealth plan should be in place at least three to six months before you go to market. Next, hire a strong investment banking firm, followed by an experienced transaction law firm and accounting firm, to help you complete the deal.
- State of the capital markets. This last factor is beyond your control. The state of the capital markets depends on various economic conditions. They influence how available funding is for an acquisition. Capital markets are cyclical and are consistently moving from a “sell environment” to a “neutral environment” to a “buy environment” – in that order. These cycles repeat approximately every 10 years, as illustrated below.
Key indicators drive the transitions between the phases in the capital markets. But predicting those takes expertise.
As Yogi Berra once said: “Predicting is really difficult, especially when it’s about the future!”
Understanding these phases is not top-of-the-mind of most business owners. This is one reason successful business owners engage a qualified investment banker to help maximize business value and identify these phases before the owner goes to market.
Market conditions fall into two distinct time frames: The present state and the future state.
The present state of market conditions includes cost of debt, leverage multiples, industry betas and public company valuations. The economic outlook provides a perspective on the future state and is influenced by currency, Federal Reserve policy, unemployment rates, GDP growth, shocks (terrorism, wars and disease outbreaks) and bubbles (technology, real estate, etc.).
The trick is to be able to accurately predict the economic outlook far enough into the future to be meaningful for a business owner, especially if he/she is considering selling a business sometime in the next 12 to 24 months.
It normally takes an owner from six to 36 months to prepare a business for sale and another nine to 18 months to complete a sale’s transaction. By then, depending on where you are in the cycle, things can change dramatically.
Advice from capital market analyst Jeff Mortimer, chairman of BNY Mellon, suggests that, barring a major “market shock,” frothy multiples paid for privately held companies over the past two years will not change any time within the next year and a half. But, after that, he believes the market will soften and move to a “protect” market state, then to a “buyer’s” market state, which will require perhaps another five years to return to its current “seller’s market” state.
My advice to clients is as follows: (1) Hire an M&A consultant to help you with your exit planning strategy and getting your business prepared for market if you are ready to sell. Next, hire a wealth planning firm to help you preserve your cash generated from the sale of your business. If both are completed, then pull the trigger! (2) If you are ready to sell and have a wealth plan in place, but your company isn’t ready to go to market, hire an M&A consultant to help you get there. Regardless of where you are in any of the two situations, don’t “dilly-dally.”
Gary Miller is a managing director consulting division at SDR Ventures, a Denver-based investment banking firm. Gary specializes in strategic business planning, mergers and acquisitions advice, exit strategy consulting and post-integration services. Contact: 720-221-9220 or firstname.lastname@example.org.