Planning Your Exit
It’s a seller’s market today and a buyer’s market tomorrow.
As the leading authority on buying, selling and fixing businesses, a large percentage of my work entails that I am always seeking out and recognizing trends that will impact the business world. Sometimes the significance of these trends is immediately noted as they start to shape the decisions and strategies of a specific industry or marketplace. Then there are those trends that end up taking an extensive amount of time to influence and shift the masses. A current trend I’ve noticed is that businesses — privately owned and typically middle market types — are fairing with better valuations when selling their businesses than in previous times of my career.
The leading forces of this in companies and industries comes down to capital, performance, economic conditions and equity values. These factors are favored by private business owners who are looking to sell now more than during any time in the past 15 years. With the economy still in recovery but steadily improving, now is the time I tell my sellers to ask themselves, “Should I consider selling my business?”
Why? Well, thanks to the recovering economy, I have more buyers than ever before, and this trend is still only just getting started. The present problem is that I have a shortage of sellers who have good cash flow businesses. Despite this, I feel that this will change eventually, and, it is important to note that when that day comes, it will become harder to get optimal pricing.
Accordingly, there is also more money in pockets than ever before, both in the hands of corporations and private equity groups. Right now there is a surplus of money and a shortage of goods, which makes it an ideal time to ultimately sell your business for more than it is worth.
Corporations and private equity groups are both hungry for good businesses. Corporations generally have two options. They can pay dividends or make investments, but corporations (on average) prefer growth investments — like capital projects or acquisitions instead of dividends. Investors are seeking higher returns on their investments, with private equity also at unprecedented levels; unless the people charged with investing that money pull the trigger, they risk losing it. Lots of money equals a hungry market of buyers looking for good businesses to bite into.
The world of business is a cyclical one, always in flux. Certain industries are trending up, and so that’s when it is the perfect time to cash in and sell. The key is to sell when your business is doing well. If a business owner waits too long to pull the trigger, they can end up missing their once-in-a-lifetime chance at capitalizing on current economic trends. And while the United States economy seems to be going in the right direction, it is typically industries such as manufacturing, oil and gas, healthcare, transportation, media, distribution, and waste and recycling that have the highest selling price. Timing the crest of trending markets has proven to be a flawed strategy for sellers who hesitate and miss their opportunity to ride the wave. For example, many business owners in the oilfield that could not see an end to high oil prices nine years ago regretted their decision and had to wait until 2012 to sell; now oil and gas is at a low again. This cyclical system is always in flux, which is also true for other industries. Therefore, it is better to sell when there’s substance to chew on and the buyers are hungry.
You’re not getting any younger. The majority of privately held business owners are baby boomers looking to plan their exit and enter the next chapter of their lives. Most business owners, on average, only sell once. Worse is that they do not even plan it out accordingly — so when they want to retire, it’s not always an immediately available option to do so. It takes months to prepare a business to be listed for sale, and then it can take years to sell. In order to successfully sell a business, there needs to be a win/win deal agreed upon between both the buyer and the seller. There are influencers on all sides of this complex process. Make sure you choose professionals who are deal makers rather then deal breakers. As a business transaction specialist, I help my clients navigate the rough waters that typically occur during the due-diligence process. I love helping business owners sort through the wide spectrum of issues in selling their business, while securing them with a premium price.
The present time is the seller’s market, but, unfortunately, most are blind to this empowering bit of knowledge. In another 10 years, it’ll be the buyer’s market — and businesses for sale will be saturated with an overwhelming number of baby boomers overdue for retirement. Now may be the perfect time to get in front of that economic curve for the majority of private companies. Life and business go hand-in-hand. What goes around comes around; you typically get what you deserve. Remember, it’s never what you know that gets you into problems, it’s ultimately what you don’t know that does.
Buyers Are Attracted and Willing to Pay Top Dollar for the Following
Longevity: Buyers like businesses that have been around for decades, with the same owner in place, as long as the technology is up to date.
Industry: Buyers want to buy industries that are thriving, not dying.
Branding: Buyers will pay more money for a business that is based upon brand loyalty, not location loyalty. The Coca-Cola brand alone is worth more than $1 billion. That amount does not include additional income for the company’s EBITDA, inventory and assets.
Sustainability: Buyers will not purchase a business if the business does not have management and employees in place. Buyers want to buy a business, not a job!
Customers: Customers are the fuel of any business. Without customers, you run out of gas. Buyers want to buy a business with a healthy customer base.
Proprietary Elements: Buyers want to purchase a business with proprietary systems, processes, patents, trademarks, contracts and a large database in place. They want to purchase a business that has a particular niche. Most buyers are not interested in your typical coffee shops, pizza places, etc.
High EBITDA: Most buyers these days are not industry specific, but cash flow specific. They are looking for companies with high-producing income. Remember, buyers are not concerned with the gross income, but rather it’s the net income that drives buyers to bid and compete on purchasing your business.
In business and in life, timing is everything. Plan your exit, and build a business that buyers are willing to pay you top dollar for.