During my 30 years of both selling businesses I owned as a venture capitalist and representing business owners selling companies, I’ve gained plenty of valuable insight. But whenever someone asks me, “What is the biggest factor business owners should focus on when contemplating the sale of a company?” I always answer:
I’m not suggesting business owners should try to time the market. Instead, if you own a successful, middle-market business I encourage you to:
- Evaluate your personal and financial goals regarding the business.
- Think hard about an acceptable time frame for selling your company.
- Keep a close eye on conditions in the marketplace that signal it is a good time to sell a business in general and your niche in particular.
The state of the market is often key to securing the optimum offer for your company. Your goal may be to sell your company a couple of years from now, but with today’s hot market – where the demand for successful, middle-market businesses is at record highs and the transaction alternatives for sellers are plentiful – waiting two years could cost you plenty.
Let me put it this way. I would rather sell a mediocre business in a great market, than a good business in a bad market. Why? In a stronger market, sellers typically have a wealth of desirable options they wouldn’t find in a weak market.
Why is the market so HOT now?
Good markets exhibit the following characteristics:
- Plenty of interested buyers.
- Cheap money available.
- Reasonable to positive outlook about the future.
Right now we have plenty of buyers and very cheap money in the market. In fact, money can’t get much cheaper than it is today and history tells us it won’t be that way forever. Plus, we have a reasonable outlook for the future. Alternatively, if we had a super positive outlook for the future, you would see higher interest rates and money wouldn’t be as cheap as it is now, although growth prospects may be higher.
Additionally, when you’re in a market with an abundance of competing buyers who have access to cheap money, you end up with strong multiples, strong valuations and a broader array of alternatives from which to choose.
In other words, for many business owners, it’s a great time to sell a company.
A perfect situation is to sell when your company is performing well and its prospects look bright against a backdrop of a very hot market for transactions, as is the case today.
Strategic and financial buyers are chomping at the bit
When you go to market, it is best to have both a universe of strategic buyers showing interest, as well as a universe of interested financial or private equity buyers.
In the current environment, strategic buyers have been demonstrating a strong interest in pursuing complementary acquisitions. That’s because they need to supplement their own relatively slow growth in what remains a somewhat sluggish economy.
On the private equity front, we are seeing PE firms using structures that they historically have been reluctant to pursue. For example, many private equity firms are willing to take a minority interest in a company, where the seller can take some chips off the table and still remain nominally in control of the company (i.e. own 51% or more post-transaction). The protective provisions for the minority investor can vary widely and need to be understood clearly by owners seeking this outcome.
Alternatively, many private equity firms are keen to acquire a majority interest with the current owner as a minority partner who continues to run the business or acts as Chairman to a new CEO agreed to by both the owner and private equity firm.
There is also a growing universe of alternative and mezzanine lenders on the scene. These lenders allow sellers to recapitalize their companies, which means business owners can take some money off the table to diversify their wealth, while continuing to maintain 100 percent ownership.
Of course there are still plenty of strategic and financial buyers who seek to purchase companies 100 percent outright. So, there are a wide variety of options out there today and certainly more than there have been historically.
So how do you know if it’s the right time to sell YOUR business?
Look for the signs.
Business owners often tell us, “I’ve been getting a lot of calls from private equity firms lately, but I’m not ready to sell now.” In truth, the fact that a business has attracted so much attention from private equity firms is a classic symptom of the “good market” I described above.
If you’re on the receiving end of calls from PE firms on a regular basis and are contemplating selling all or part of your business in the near to immediate term, don’t ignore that sign.
Instead, ask yourself how many inquiries were you getting to sell your company in 2008-2009 or 2001-2002 – probably not a lot. Good markets come and go in cycles. So if you want to sell a company in the next two to three years, then you should consider taking action now. By doing so, you will be able to take advantage of an environment with a multitude of competing buyers and those high multiples and valuations.
And, you don’t need to go it alone. An experienced investment banker with knowledge of your industry sector can be an invaluable resource. He or she can describe the conditions specific to your niche and the opportunities presently available to you.