Is time running out on the sellers' market?

Now is a great time to sell a company. But is time running out on the sellers' market?

When is a good time to sell?

CEOs and business owners routinely ask the question, When is the best time for me to sell? Is now a good time or should I wait? Truthfully, many of the folks that address that question (investment bankers, private equity professionals, financing sources) have a vested interest in having companies go to market. So business owners can be skeptical when reading optimistic projections. 

We have advised business owners for years that there are a number of factors to consider when evaluating if it is a good time to sell a business. The most important is to make sure your company is prepared, and to not wait for the "absolute best time" to sell, but to sell when the market is good. There are lots of examples of companies that have regretted not going to market in 2006-2007 because they thought the market for their company would be better in 2009 or 2010.

There are a number of factors that suggest that 2015-16 is still a terrific time for lower middle market company owners to sell.  

  

1. Company results have rebounded or stabilized.   Most lower middle market companies have rebounded or at least stabilized from the downturn. Even if revenue growth in some sectors is still very moderate, most companies have done an excellent job of managing expenses and increasing cash flow.

2.  Valuations are high.
With stock market at record levels, the prices (multiples of EBITDA) being paid for good companies are at high levels.

3.  Interest rates are still low.  

This is important since the buyer of your business need to borrow for the transaction.

4.  Private equity firms have plenty of dry powder and fewer distractions from older investments. Many private equity firms spent the years in 2013-14 selling their portfolio companies. They now have lots of capital to invest and need to put that capital to work by buying companies. They also can focus most of their attention on looking for new opportunities.

5. Private Equity has an increased focus on lower middle market transactions.

According to a 2014 survey  of 1000 dealmakers conducted by KPMG and Merger & Acquisitions magazine, a whopping 77% of respondents expect most of the M&A activity in the near term to be in the lower middle market space.

6. Strategic buyers still have lots of cash.
Strategic buyers have been accumulating cash in record amounts as they have emerged from the downturn lean and more productive.

7. Strategic buyers need to find new ways to grow. 

Sources of organic (internal) revenue growth have been difficult for most strategics. They are under pressure to acquire companies that add new products, new customers, new geographies, and new capabilities.

8. There are still more buyers than sellers in the market. 

The number of baby boomer business owners who are reaching retirement age is increasing daily. There will come a time when these business owners need to sell and there may well be a glut of businesses on the market. This has not happened yet. By 2016, there may be as many as 1.5 million business owners who need to sell to provide liquidity for retirement - even adjusted for new retirement expectations that changed during the recent downturn.

Is time running out on the sellers' market? A number of clouds loom on the horizon: When will the Fed begin to raise rates? When will the bull stock market correct by 20% (or more)? With overall U.S. GDP running in the 2% range, will a European shock trigger a  negative reaction in the U.S.?

How long before the next recession? Consider this fact: The last 3 economic expansions lasted 7.9 years. We are 6.1 years into this economic expansion. That means that it is likely we will be having a different conversation by this time in 2017. 

Are you and your company ready to go to market?

Most business owners who have executed a successful sale of their business will tell you the most important thing is: BE PREPARED. It typically takes 6 + months to sell a company and another 12 months (or more) to get prepared.  

Selling a business is very different than operating a business. As a business owner you know your industry, your product or service, your customers and your markets. Most business owners will only sell a business once in their lifetimes - and it can be by far the most important financial transaction of their lifetime.  

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The Mead Consulting Group has helped over 60 clients prepare for successful sales transactions ranging from $15M to $350M in transaction value. We help companies increase the value of their businesses leading up to a transaction, minimize the things that cause potential buyers to discount the price, prepare to best position the company, and assist the owners in building a  transaction team.

What successful business owners say about us:

 ...We could not have completed the sale of our business without the advice and guidance of The Mead Consulting Group. Their experience was critical in helping us prepare, and endure, the transaction process to a successful outcome. ...Charles M, President, Healthcare IT Company

A successful process is draining and stressful.  The Mead Consulting Group brought the experience and expertise necessary to help our team focus on the critical issues and not get caught up in the multitude of items that can derail a transaction.  Why reinvent the wheel?  We chose to take advantage of individuals who could help us understand the nuances, negotiate effectively, and close the deal. ...  Ken W., CEO, Behavioral Healthcare

...We missed the opportunity to sell our family business during the last upcycle. Mead Consulting helped us grow revenue and EBITDA to record levels and guided us through the selection of a transaction team. Dave Mead and his group provided great counsel throughout the sales process, removing obstacles and firmly encouraging us to a great deal with a strategic buyer that mirrored our family business values. ...Dan M, President, Building Products Company

...I do not know why anyone would attempt to sell their business without Mead Consulting. Since they have owned and sold their own businesses, they understand the challenges of continuing to run the business while trying to sell it. Their experience kept us focused on the right things and they helped keep our transaction team well-aligned during the process. They truly act as the advocate for the CEO and owner, helping to make sure that it was the best deal for the owner. ...Ron T, CEO, Software Business

Don't miss another opportunity to sell during the upturn

[Editor's note:  In April 2009, we published this article. Many business owners had missed the window of opportunity to sell during the 2003 -2007 window when selling price multiples were at all-time highs. In 2014-15, we again have market dynamics that mirror 2006-7 - selling price multiples are again at high levels. It is a sellers' market with far more buyers than sellers. How long will this cycle last? . Many economists expect the next downturn as early as 2017. No one knows for sure. However, there is one thing for sure - if you missed the favorable opportunity to sell once, do not let it happen again.       -DPM]

Dan McCallin, former owner and CEO of Commerce City-based Timberline Steel recently made an interesting statement about his company: "We missed the selling boom of the late 1990's and were determined that we would not miss another opportunity to sell during the next upcycle. We decided to take the steps so that we were prepared." While Dan originally made that statement during the recession of 2002, and later sold the business in early 2006, it could certainly apply today. 

The full exit sales process may take several years.  With credit markets tight, the economy in recession, and bad news seemingly everywhere, it may seem counter-intuitive to be writing about preparing your company to be ready to sell during the next economic upturn. While some business owners may believe they can pull the string when they are ready, the truth is, for many business owners, it may be exit sales cycle may take several years to execute. Professionals will tell you that in order to sell at highest value, the process includes 1-2 years to get ready, 1 year for the transaction, and then you may have to spend another 3+ years with the company after the sale.

Much of the preparation can be accomplished during the down cycle. Companies can focus on making fundamental improvements to their business during the downturn that will help them emerge faster and healthier than their competitors.
1.    Focus on customer net profitability
2.    Upgrade management
3.    Cleanup business processes
4.    Develop a strategic growth and execution plan
5.    Position the company for the upturn
6.    Never waste the opportunity of a good downturn

Customer net profitability.
The tendency during a downturn is to cling to any customers and revenue no matter the profitability level. A common comment is that "at least they absorb overhead." The notion of unprofitable business absorbing overhead may be one of the greatest false beliefs in business. In many cases, overhead that has been viewed as fixed is really a cost that can be minimized or shed. Carrying unprofitable business will be a continuing cash drain that may inhibit your business' ability to grow as the economy improves.

Upgrade management.
There is a great supply of good talent now available in the marketplace. In many cases this may be talent that would not be available in better times. Take advantage of the opportunity to improve. Similarly, this is a great opportunity to review all of your employees and weed out those with below average performance, poor potential, or unrealized potential. Our clients use a simple tool to rank all employees in terms of potential and performance - the results make it very clear which ones have been a drag on the company.

Cleanup business processes. During boom times, many companies claim they are too busy to scrutinize business processes to make improvements and to streamline in order to increase throughput. That "excuse" typically does not apply during the downturn.

Develop a strategic growth and execution plan. You need a plan not only to help you survive the downturn, but also that will allow you to be agile enough to take advantage of opportunities in the recovering marketplace. There may be market segments that will be slow to come back; some may never come back the same way. Other market segments, however, may present huge new opportunities. Your organization needs to develop a plan and be prepared to execute.

Position your company for the upturn.
The most significant competitive gains are made during a downturn. Companies that are prepared and well-positioned can accelerate very quickly as he markets healthy. Competitors that are under stress during the downturn will actually be under greater stress as the economy improves. Cash demands can be low when demand is low. Cash needs, however, will increase as the economy improves. Companies will need cash to hire more people, invest in inventory and equipment, etc. 

Never waste the opportunity of a good downturn
During downturns, companies have the opportunity to examine everything, reduce unnecessary expenses, trim those under-performers, examine unprofitable business, streamline business processes, etc. 

Take a lesson from the Boy Scouts: Be prepared.
These steps can add value to your business - even during a downturn. When the economy improves, your business can accelerate faster and be well- positioned. The market for selling a business will be ripe in late 2010 and 2011. Those businesses that are ready will find a hungry group of buyers and investors who have been sitting on their hands during the recession.
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What's the old saying - "Miss your chance once, it's a shame; Miss twice, shame on you!"

If you have not yet prepared your company ready for sale, we can help. The Mead Consulting Group has been helping companies prepare to maximize value for exit for many years. We have helped over 50 client companies successfully sell outright or recapitalize their business to take "chips off the table." See what some clients have said about their experience with Mead Consulting.