“When should I sell my business?” This is the current battle cry from business owners.
With so much in the news about inflation and increasing interest rates, it’s not surprising that business owners are getting anxious. Those that are currently trying to sell are worried their deal won’t close before the capital dries up. Owners who are still building their business worry we will never have as strong an M&A market in the future as we have now.
Having received many calls with questions about market timing I will respond as I always do – I don’t have a crystal ball to foretell the future. The economists can battle it out from every angle, and the WSJ had a great article on inverted yield curves Monday, but in the end – nobody truly knows how long we have left in this high deal value cycle we are in now!
So many unknowns today! Don’t let your fear render you complacent in developing your exit strategy. The quicker you do it, the better the chance you will be successful when you do go to market.
It’s important to understand the economic indicators driving the M&A cycle, which you can read about here. Economics aside, there are other considerations, such as whether your business is positioned to attract a buyer or if you’re in the optimal stage of development to go to market.
We have a client in the technology industry who was considering selling this year to take some chips off the table. We created his Master Exit Plan, so he understands the current M&A value of his company and what he can do to further increase the value. His business is currently highly attractive and yes, we could certainly sell it today, however, his business is on the brink of extraordinary growth. In the next twelve months, as he executes his optimization plan, the EBITDA will move north of $4 MM. This growth will position his company to attract more buyers, which will drive the multiple into the top tier for his industry. So while yes, his business can sell today, if he waits another year it will mean millions of dollars more in his pocket.
Of course, that decision involves weighing the risk factors beyond his control that could potentially negatively impact his deal, such as geopolitical impacts or a potential increase in tax rates. In the end, his valuation and SWOT analysis (Strengths, Weaknesses, Opportunities, Threats) guided him to decide that waiting and driving his value to a higher level was worth any potential risk. The upside was just too great to sell today.
When evaluating the timing to sell your business, a quantitative and qualitative analyses will provide you with the information you need to assess all of the factors mentioned above.
The qualitative analysis reviews eight characteristics that drive the profitability of a business and will guide you in understanding the marketability of your business:
Strategic Planning – A strategic plan presents to a buyer how the business will realize future growth in order to achieve the investors’ required return on investment, which increases marketability.
Leadership – A strong management team assures an investor that the business is not owner- dependent and will continue to grow under new ownership.
People – Today’s ‘Great Resignation’ environment has rendered employees one of the highest valued intangible assets. A strong team is critical and why we are seeing deals done with a sole focus on acquiring the people.
Marketing – A robust marketing plan that effectively relays your value proposition creating a moat between your business and its competitors will drive sales, which gives investors confidence in future growth projections.
Sales – Future predictable revenue is the gold standard for an investor. Sustainable revenue lowers the perceived risk through a buyers eyes making the business attractive.
Operations – Supply chain issues are currently dampening the appeal of many businesses as an investment and highlights the importance of having strong operational procedures and contingency plans to offset any possible disruptions.
Finance –An accounting team that goes beyond reporting and is sophisticated in their ability to secure capital to fund growth adds to the value of a business making it more attractive to an investor.
Legal – A strong legal team not only ensures you are protected from future litigation but also protects the assets of your business, such as any intellectual property.
When timing your exit, you first need to be sure you are building a business that is going to attract investors. Then it is important to pay attention to the M&A cycle and factors that influence the amount of capital available to get deals done.
So perhaps focus on your business and the drivers that create real value and quit watching the news.