Before we explore the situation creating the urgency to exit a business now, it’s wise to review the three factors which have the greatest impact on the sale price of a business other than the targeted buyer.
The first factor is the business’s cash flow. It’s often defined as SDE (Seller’s Discretionary Earnings) for Main Street businesses and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) for Middle Market businesses. Clearly, these measurements of income are something over which the business owner has some control. At least in theory, the business owner can work to improve this important factor given sufficient time.
The two other important factors include the industry’s favor and the Merger & Acquisition climate—both of which will change over time. And neither of these are under the business owner’s control.
Unfortunately, when you ask most business owners about their time horizon to exit their business, they respond by saying they will sell their business when it suits their personal needs. In fact, according to a recent survey by Citizens Commercial Bank of more than 450 middle market business owners and decision makers, supplemented by a series of in-depth interviews, “nearly 70 percent of business owners say their expected retirement date will significantly impact when they decide to sell their company.”
While on the surface using the business owner’s expected retirement date to initiate the sale of a business seems logical, the reality is this single-minded approach does not consider industry favor and/or the M&A climate and likely will translate into less cash for the business owner.
As an observer of the M&A climate today, it’s clear to me that there may not be a better time to sell your business for quite some time. And here’s why.
Historically Low Interest Rates Only Have One Direction To Go
Interest rates have an incredible influence on the price paid for equities. This is true in the public markets as well as in the private market where Main Street and Middle Market businesses are sold. And just as the low interest rates have contributed to the rising prices paid on Wall Street today, we are seeing record-setting low interest rates driving record-setting privately-held business M&A transactions—as measured by the number of deals, and dollars paid to sellers.
When asked about the impact on rising interest rates in the future, Neil Wessan, CIT Capital Markets Group Head and Managing Director stated “for mid-market M&A, the main impact of interest rates is on the price people will be willing to pay for companies”.
In the current low interest rate environment, investors seeking a better return on investments are competing fiercely for private businesses. And the prices paid for these businesses are very high resulting in rich deals for sellers.
But it’s only a matter of time before interest rates will rise and the prices paid to business owners for their ownership equity will decline.
$1.2 Trillion Dry Powder Seeking ROI
Dry Powder is the nickname for cash on a Private Equity Group’s Balance Sheet which has been committed by its investors and is yet to be invested. According to Bain & Company, in early 2015, dry powder reached an all-time high of $1.2 Trillion and the major result of this glut will be increased deal-making and rising valuations.
Combine today’s record-level dry powder held by PE firms with strategic corporate buyers seeking to meet revenue growth and profit targets by acquisition and you have a recipe for a seller’s market.
Boomers Are Exiting Now
According to the Pew Research Center, beginning on January 1, 2011 and ending in 2030, 10,000 Baby Boomers will celebrate their 65th birthday every day. Many predict a Tsunami-like business exodus by Baby Boomers during this time.
It’s yet to be seen if this generation will be successful in exiting their business by selling or will be forced to hand the keys over to the bank and walk away. Regardless of the Baby Boomers’ exit path, it is estimated that nearly four million businesses will have a change in ownership or close their doors in the next 15 years.
I’m willing to make a pretty big bet that the present day seller’s market will be short-lived and a buyer’s market will be the new normal for a very long time . For those business owners who have been working on growing their business, improving their business income, and whose industry is not out of favor, it’s a great time to sell. Even if your industry is out of favor, selling now may still be worth serious consideration.