If you own a high-performing company in a growth industry, now may be an ideal time for an M&A transaction. The economy is booming, company values are up and investors have idle funds they need to put to work.

In fact, if you own a middle-market company and are not thinking of selling or raising capital, you probably need to think again. We’re in the ninth year of a steady economic recovery with perhaps two years to go. You have opportunities now that might not be there in 2019.

Many entrepreneurs, especially those nearing retirement age, have spent 20 years or more building a successful enterprise. They have lived through recessions, a technology revolution and all sorts of other challenges. For them it might be time to sell all or part of the business or to pass ownership to their children. Other experienced business owners might even feel that they’d like to remain at the helm for years to come and grow by acquisition.

At the same time, young entrepreneurs who have rapidly grown their businesses may also be considering an M&A transaction to attract capital, or strategic talent, or both.  Or, they might just want to transition to a new venture, invest in a meaningful cause or take some chips off the table to enjoy the fruits of their labor.

Regardless of where you fall in the generational spectrum, you’ll have three foundational questions to ask yourself before you consider an M&A transaction:

1. Why am I selling my business?

Whether you want to admit it or not, there will typically be one overriding reason that has prompted your interest in selling. It can be good or bad, but you can be assured that buyers will always ask why the business owner wants to sell.

Many owners are not prepared for this question, and the wrong answer can negatively impact their ability to close the deal or negotiate a desirable price and terms. While it’s critical that you be honest with yourself, it’s equally important that you have the stamina and commitment to see your exit strategy through to successful completion.

For example, if your answer is, “I’m just tired of running the business and want to take a long vacation,” that could be enough to make buyers nervous, and it might just scare them away. They may assume you have lost interest in the business or that your company is floundering and needs more attention than you are willing to give it. Any such assumptions could affect the price and terms the buyer is willing to offer.

Before you begin the sales process, take time to clearly determine why you are interested in selling, and more importantly, what personal and financial objectives you hope to achieve through a sale. You should also clearly communicate these objectives to your investment banker to ensure the entire sales team is in sync with your wishes.

2. What is the best time to sell my business?

In life and in business, timing is everything. While it may seem obvious that your business is worth less  when you are suffering through an economic recession, it’s also unwise to consider a sale when your business has peaked or has begun to decline. The ideal time to sell is during a strong economy when your business is performing well and the future looks bright.

This maximizes value and provides you the best leverage with potential buyers. Because buyers are investing in the future of the business, they need to see a pattern of growth with additional room to climb. Most investors prefer that owners remain with the company for a while to ensure a smooth transition and continuity with customers, employees and suppliers. Selling when you are healthy and still highly capable of contributing to the success of the company can increase the company’s valuation.

The state of the economy also affects company values. When the economy is growing and demand for products and services is high, the value of well-managed companies is high too. If the economy is crashing or in a slow recovery, company values can be flat at best or they might even decline.

The time it takes to sell should also be considered. Normally, it takes 9 to 12 months to sell a middle-market company, even in a strong economy. Owners should plan for this when they prepare a timeline for the potential sale. Remember, timing is everything!

3. How is my business performing?

Buyers want to invest in winning companies that have great potential for future growth. They avoid companies that demonstrate declining sales or have legal issues or other problems. When it comes to how a business is performing, the company will typically fall into one of three categories:

  • A growing company in a growth industry.
  • A stable company in a stable industry.
  • A declining company in an ailing industry.

Companies with declining performance in an industry that is stagnant or dying offer the least value to potential investors. Rapidly growing companies in high performing industries will be more valuable, because they offer the highest potential return to investors.

If you own a high-performing company in a growth industry, now may be an ideal time to sell. The economy is growing, company values are up and investors have idle funds they need to put to work. The answer to “Why am I selling?” is best expressed in your thoughtful responses to the questions posed above.

If you can conclude that you are selling because today’s market offers well-positioned organizations like yours higher multiples than at any other time in recent history, then you’re ready to proceed.

At Allegiance Capital, we want you to know what you’re getting into when you sell your business. We view educating prospective clients as one of the most important things we do.

We like to begin our process by offering a free book called Street-Smart Moves for Selling Your Business by Joe Aberger.  It’s brief, well-written, and addresses 29 topics that are critical to selling a business like yours. Be sure to Sign Up Now.

And, in the meantime, if you have questions, feel free to call me at 214.217.7757.


About the Author

Eric Kern
Senior Vice President
Phone: (214) 217-7757
Email: info@allcapcorp.com