The federal reserve has cut interest rates by half a point. What does it mean for the timing of taking your business to market?
When assessing market factors to sell a business we focus on three external factors:
- Cash – How much cash do investors have on the balance sheet that can be used for acquisitions? Excess cash allows investors to buy businesses without having to rely on external financing which stimulates mergers and acquisitions activity. Fiscal policy of lower tax rates increases cash reserves for a company. Monetary policy of lower interest rates also has the effect of increasing cash held by investors as the returns on alternative investments decrease, making investing in businesses more attractive.
- Credit – The cost of capital impacts deal activity and business value. Debt financing is the most common way to finance a deal so when interest rates are low, M&A activity is stimulated and buyers can afford to pay more for a business. When we are in a high interest rate environment, the reverse is true; capital dries up and there is a downward shift in M&A.
- Confidence – Confidence influences investor behavior and is driven by dynamics or cycles in our economy–interest rates is just one driver. The geopolitical landscape and the health of a target industry are also drivers. Economic cycles of expansion, peak, retraction, and a trough are as old as time and drive the M&A cycles. The economy is a leading indicator and M&A activity trails behind.
Business owners do not control the external factors but they must be able to analyze economic indicators when assessing the timing to sell their business. A positive cycle with Cash, Credit, and Confidence, aligned with your business well-positioned to go to market, will always result in achieving the best price and terms. You can read more about timing in my book Master Your Exit Plan.
While an interest rate reduction of a half point is a positive step, the big impact now on the M&A activity will not be on Capital availability but Confidence. 2008 economic disruption taught us that without Confidence it doesn’t matter how low interest rates go. Investor Confidence drives deal activity. If the Federal Reserve continues to cut interest rates, making capital less expensive for investors, we will see an uptick in M&A activity and business valuations.
2025 could be a great year to take your business to market but you have to be prepared. The earlier you prepare the more successful your deal.
Assessing the internal factors of your business is equally important. While you can’t control the external factors above, you can, however, control the internal factors that influence the marketability and success of selling your business. Legacy Partners’ Master Exit Plan is designed to guide clients through optimizing these internal factors and improving the marketability of their business.
We have many clients who are currently executing their Master Exit Plan® and repositioning their business to prepare for a future successful sale. Click here to read a few specific examples of adjustment they are making.
- EBITDA Drag – A division (could be product or service) is a drag on EBITDA, crushing the business’s marketability and will greatly reduce the price they will receive from an investor.
- Customer Concentration – Investors do not like to see a high dependence on a small number of customers so customer diversification is critical. This can be like turning a barge so the earlier you start the better. A higher perceived risk always results in a lower price.
- Older Salesforce – The baby boomers are retiring and if a business doesn’t have depth on the sales bench and the drivers of revenue are getting ready to retire, the future cash flow that a buyer is investing in is at risk which equates to a lower price.
- Weak Recurring Revenue – The business model hasn’t quite matured and the recurring revenue as a percent of total revenue is dampening value. Future predictable revenue always drives deal value.
- Leadership Gaps – The owner holds all of the customer relationships. The future success of a business requires a well-balanced, experienced leadership team that will ensure the business will continue to grow without the owner in it.
- Industry Competition – The business’s marketing position needs improvement due to the competitive nature of their industry.
The majority of business that go to market do not sell and many of our clients come to us with opportunities to improve their business value. There may be operational inefficiencies, financial factors, market or business specific factors that can be improved. Their future success is dependent on executing a strategy within a specific timeline so they can sell their business, minimize taxes, and enjoy the next chapter in their lives.