by Dave Driscoll
In SBM’s January issue, we detailed three internal factors that affect the timing of the sale of your business. Now let’s talk about external factors that impact when you take your business to market.
One thing you can count on is that the economy will always expand, peak, retract and expand again. This cycle is as old as time and is a leading indicator for the mergers and acquisitions cycle.
When the economy is strong, capital is available to get deals done, which leads to increased deal flow, firmer multiples, and closings. But when the economy falters, capital dries up, which results in slower deal flow and softer multiples.
Business sales are generally limited to financially strong companies in a growing market segment, with a buyer who is financially and operationally solid.
One exception is smaller “lifestyle” businesses with sufficient cash flow to provide adequate income for the owner, satisfy the debt, and show potential for further return on investment. The Small Business Administration (SBA) was created to finance this type of business (up to $5 million), so these transactions are less dependent on economic factors. Such lifestyle businesses largely sit outside of the cyclical M&A market, with minimal impact from interest rates and the trajectory of the economy.
Business owners planning to sell should pay attention to the three Cs of finance —cash, credit and capital. An owner needs to keep a pulse on these economic indicators to understand where we are in the M&A cycle.
1. Cash. The availability of capital drives deal flows as well as how assertively lenders pursue loans. Think of the financial crisis of 2008-2009, when businesses and individuals hoarded their capital, and lenders were not actively looking for borrowers.
Taxes also come into play. In a low tax-rate environment, buyers have more cash on their balance sheets. When buyers have cash, lenders are offering funding, and taxes are reasonable, buyers will be identifying opportunities to produce a return on their capital. This scenario stimulates deal activity as buyers/investors are motivated to put their cash to work.
2. Credit. The Federal Reserve and current monetary policy influence the cost of credit. If interest rates are low, then the cost of debt is reasonable, which promotes increased buyer demand for businesses and maximizes the price they are willing to pay to acquire.
Conversely, if the Fed is increasing interest rates to manage inflationary pressures, then the cost of financing increases, thereby suppressing the buyers’ appetite and, therefore, deal flow.
3. Confidence. Once again, reflect on the Great Recession that was in full swing in 2008-2009. To manage the financial chaos, the Federal Reserve stepped in to save critical industries. Interest rates were lowered as never seen before to stabilize and, if possible, grow the economy out of recession. Lenders were worried about their customers’ financial health, underlying cash flows, and asset values. They weren’t focused on making new loans; they were managing day-to-day and monitoring the unfolding events. The economy was dragging, and the lack of investor confidence kept the economy from growing.
Current events can shake the confidence of investors, lenders and buyers.
Geopolitical events are often unpredictable and can make the global economy seem tenuous. An unforeseen disruption can impact the health of entire industries. Economic cycles are dynamic, greatly influence market sentiment, and are beyond the control of investors and sellers.
High investor/market confidence indicates a seller’s market, and premium prices are paid for businesses. Conversely, low confidence moves the cycle into a buyer’s market with discounted acquisition prices compared to value. Economic confidence always drives market behavior and provides a guideline regarding the best time to sell your business.
The key takeaway: Sellers should be aware of current and projected economic and market conditions and attempt to time their “go to market” when conditions are favorable. Gauging market timing will always depend on the health of the economy, the industry and the seller’s specific business. And remember that it generally takes four-to-eight weeks for a business broker to launch your business. You can’t sell your business in a day. Finding the right buyer typically takes up to 18 months.
Dave Driscoll is president of Metro Business Advisors, a business brokerage, valuation and exit planning firm helping owners of companies with revenue up to $20 million sell their most valuable asset. Reach Dave at DDriscoll@MetroBusinessAdvisors.com or 314-303-5600. For more information, visit www.MetroBusinessAdvisors.com.