Current Market Conditions For Selling Privately-Held Companies
Companies will sell in a strong economy or a weak one, and companies are definitely still selling now, despite the current market uncertainty.
It is a truism in our industry that the best time to sell a company is when it is doing well and when the market is up, as that is the condition most attractive to buyers. Growth, or at least the potential for it, is always important to an acquirer, and in a weak economy, it is harder for companies to grow (obviously, many are just trying to survive).
Declining growth may make the sale more challenging, but it does not mean that it cannot be done, or that sellers must sell at a fire-sale rate to move their companies. There are other ways to structure a deal to mitigate buyers' concerns and achieve an outcome satisfactory to both parties.
In any case, the economy will influence the prospects of a company for sale. As part of the service we provide, we counsel our clients on how to respond to the current market conditions, in order to best position their company for sale.
"Sell When the Market Is Up" Is Too Simplistic
If you are considering selling the company, it is important to remember that the optimal time to do so is driven partly by internal and partly by external factors. There are too many factors at play to boil that weighty decision down to a simplistic "sell when the market is up."
Furthermore, while the general economy is stabilizing, it is very unlikely to rebound significantly for at least a few years, and your industry may not see an "up market" again for a long time (this varies considerably by industry).
As well, trying to align all market, company and personal factors perfectly may result in missing the best opportunities for you or your company.
Other Factors to Consider
Here is an incomplete sampling of factors to consider. Effect of Tax Code Changes
While it is not yet a legislative certainty, business owners must plan for an increase to the capital gains tax rate at the end of 2010. The current maximum 15% capital gains rate will increase at the end of 2010 if no legislation is passed by Congress to extend the current, historically low rate.
The large federal deficit must be
addressed, and regardless how one feels about the political issues
associated with changes to capital gains, it is only prudent to assume that it
will happen.
For owners even vaguely contemplating a sale in the foreseeable future, it makes sense to consider doing it in 2010. The net, after-tax effect of selling in 2010 versus 2011 may be substantial enough to warrant going to market immediately.
Burnout
Owner(s) who feel burned out and have lost their enthusiasm for running their company probably do far greater damage to their prospects for optimizing the sale price than a down economy. The same notion applies to entrepreneurs who already have shifted their enthusiasm to the next venture.
Inability or Insufficient Capital to Take the Company to "The Next Level"
A company that is not actively pursuing growth will fall behind in its market. Companies must "keep running" to stay ahead. After a certain point in the company's growth cycle, founding management of a company is often not the best team to manage the company in the next phase. Additionally, it may be hard to raise growth capital if lenders do not feel that the right management team is in place.
In some cases, shareholders may build more wealth by selling and reinvesting the proceeds of the sale than by continuing to run the company.
Effect of Interest Rates
A key factor in the sale rate of privately-held companies is interest rates. While the currently very low interest rates are not a panacea for the overall economy, they definitely provide a business stimulus and are favorable to sellers and buyers of companies.
Generally, in a robust economy and/or a time
of low interest rates, buyers can afford to take on more debt, either
of which may translate into a more rapid transaction. While the
economy is no longer robust, the interest rate is very low.
Debt Financing Availability The traditional lenders such as banks are funding creditworthy deals, however their definition of "creditworthiness" is very restrictive, compared to a few years ago.
Lenders look much harder at the creditworthiness of the acquirer and the acquired company than previously, and are generally much more risk averse than before.
Fear is pervasive in the current market, and has significantly disrupted it. This will pass eventually however, and there is plenty of private equity capital available to fund the acquisition of small companies.
Equity Capital Availability
At least daily, we have private equity investor groups contact us expressing a desire to acquire certain company types that are profitable and solidly run. There is a surplus of equity capital in the market looking for good businesses to buy. These funds raise money on behalf of investors, and are beholden to invest it for them. They will fund acquisitions with a combination of that equity capital plus debt.
Typically, they are interested in retaining current management's involvement with the business, at least in some temporary capacity.
These acquirers generally seek companies making at least $1+ million/year in earnings before interest, taxes, depreciation and amortization (EBITDA).
Effect of Corporate Layoffs
Corporate layoffs tend to introduce more individual buyers to the market, often with severance packages, 401 K's and IRA's that can help fund the acquisition of a company. This factor tends to have a greater influence on very small companies than mid-sized ones, but nevertheless it is not uncommon for corporate executives with significant management experience and access to funds to acquire mid-sized companies in partnership with other buyers, such as private equity investors.
In fact, we are currently seeking suitable companies on behalf of some of these partnerships.
Overall Expectation - Transaction Timing
It is prudent to expect the economic downturn to slow the transaction process, and recent industry surveys indicate that the average time to sell small and mid-sized companies has been extending already over the past few years (during a good economy).
In a weakened, uncertain economy, the average may drift further out, maybe as long as eighteen months.
Conclusion
If you want to sell your company soon, it would be wise not to delay the process, considering the possibility of a longer sale process and possible tax code changes.
Keep running the company as though your intent were not to sell. Consider trimming discretionary expenses to maintain profit margin, but do not risk losing distribution, key contracts or consumer sales by cutting core marketing costs.
Have your accounting advisors get your financial reporting system and statements in pristeen shape, as this will greatly enhance the likelihood that the deal will close.
Be prepared to help a buyer understand what is required to maintain growth during a down economy, and by doing this, demonstrate that your company can weather the storm. This will enhance the desirability of your company.
Please see When to Sell A Company also.
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