The macroeconomic conditions might be tough, but there are still opportunities for companies trying to grow through acquisition
By Gary Miller – Managing Director, Consulting Division, SDR Ventures
I am often asked: “Given the economy, is this a good time to sell my business?”
The answer lies in understanding a number of internal and external factors, not the least of which are U.S. and global economic and market conditions.
It is no secret that the last seven years have produced, at best, a tepid economic recovery. Many companies are facing slow growth rates, more federal and state regulations, increased health care costs, and a lack of confidence in the economy. U.S. economic growth in last year’s final quarter was only 0.7 percent.
On the global front, China, the world’s second-largest economy, grew last year at its slowest rate in more than 20 years. BRICS countries — Brazil, Russia, India, China and South Africa — are all facing a cloudy future. According to Citibank, the global economic outlook is bleak and the International Monetary Fund has lowered its 2016 growth estimates for the world economy. The U.S. economy is projected to stay flat throughout 2016 and potentially 2017. With slow global growth, a strong dollar, weak oil prices, and a low labor participation rate, some would say that the U.S. economy looks like a field hospital after battle.
Capital markets are changing too. The number of mergers and acquisitions that closed in 2015 was lower than in 2014. Deal multiples were lower for the same comparable period. The Wall Street Journal reported, just a few days ago, that the number of initial public offerings by young companies in January 2016 was … zero. The reason is “a broad retreat from risk by investors.”
With $19 trillion in U.S. national debt and the lowest labor participation rate since 1978, it’s no wonder that business owners are uncertain about selling.
While macroeconomic conditions are important factors to consider, often personal factors — such exit planning issues as health, family status, retirement goals, etc. — play an even more significant role in the owner’s consideration. If health issues, a looming divorce, transferring the business to family members or retirement concerns are important factors in your decision process, then I recommend that you begin now to prepare your company for sale.
Strong preparation is critical for successfully closing a transaction, even more so today as buyers are on the hunt for quality companies to add to their portfolios and accelerate their own growth plans. Depending on the condition of your company, it can take six months to three years just to prepare to go to market, and another six to 12 months to close a transaction. Don’t wait another day to get started.
If you need help, hire high quality, experienced advisers to speed up the pace of preparation so that you can concentrate on growing the top and bottom lines while cutting expenses wherever possible.
In spite of the current state of the U.S. economy, there is some good news for business owners: Companies with quality performance drivers (consistent earnings, solid management and consistent growth) are still being sold successfully — and with high valuations and high multiples.
So if you are ready, I recommend that you move quickly before the markets change significantly. Most experts predict that the M&A environment will remain steady for the next year or two. After that, some economists predict a mild recession beginning in late 2018 or early 2019.
Not sure? Many large and small companies trying to grow before putting themselves on the market use acquisitions of their own to speed expansion. Today, interest rates are low and terms and conditions are reasonable, and lenders and investors have money they want to put to work.
My advice to business owners is to consider all of the factors discussed above. But if you decide that it’s time to sell or buy, strike while the iron is still hot.
Gary Miller is the managing director of the Consulting Division of SDR Ventures, a Denver-based investment banking firm. Gary advises business owners on strategic business planning, M&A, and raising capital. Gary often speaks at conferences on M&A matters. Contact 720-221-9220 or firstname.lastname@example.org.
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