2009 Is A Horrible Time To Sell My Business-You Could Be Horribly Wrong
Posted by Brian J Reilly at 4/23/2009 1:35 PM
If you own a business you presumably have a working knowledge of business basics such as: supply and demand, supply chain dynamics, availability of capital, and valuation. As a Mergers and Acquisition Intermediary, I like to think I know how they apply to my business and how they can have a huge impact recapitalizing or exiting your business.
I talk to business owners and groups who seek to buy established businesses every day. In this blog I will focus on the lower Middle Market businesses with annual revenues of $5-$75 million, but these concepts apply to larger and smaller businesses as well.
Supply and Demand and Supply Chain Dynamics: There is a huge industry called Private Equity that has thrived for last 10 years and they are still around, even in a recession. Private Equity buys businesses, runs them, merges them, grows them, sells them and sometimes takes them public. There is a food chain in Private Equity: from groups that acquire businesses with as little as $2-3 million dollars in revenues-to The Carlyle Group, Blackstone, KKR, Goldman Sachs, and others who acquire multi billion dollar companies; and the thousands of groups that fall in between these ends of the spectrum. These groups all have one thing in common they need to acquire companies to keep their businesses running.
Many business owners are currently afraid to sell in a recession creating a huge lack of supply of companies, short supply-same demand-raise prices. Bigger fish are paying more for bigger companies and it trickles all the way down to the lower middle market.
Availability of Capital: You say this is all nonsense Private Equity can’t get capital from frozen Banks, you’re right they can’t so they are either buying bank assets (IndyMac acquired by a group lead by Dune Capital), or becoming banks like Goldman Sachs. The Private Equity business generates profits for private individuals and groups who invest capital with them. They have used banks for leverage in huge deals in the past but there are now more then enough alternative sources to replace bank capital at historical interest rates. No one wants to put investment capital into banks or very low fixed interest securities for the longer term.
ost Private Equity have far more cash then can deploy in the current market, leading to a spike in demand for business to acquire. Every day I have private equity groups calling me saying “We have to deploy capital”, “30 day closings”, “No bank financing”, “No owner financing” there is simply too much cash and not enough product for Private Equity to conduct business.
Valuation: Business are valued on historical performance typically in a multiple of EBIT or EBITDA; and this multiple is set by what the market will pay.
What the market will pay is based largely on the availability of companies. So the two questions you have to ask yourself are: Do I want my company valued base primarily on 2007-2008 EBIT or 2009-2010 EBIT? and, Do I want to sell my company when there is a huge shortage in the market or do I want to wait until 2011 and beyond when baby boomers start turning 65 and flood the market?
As you can read in previous blog entries, companies down 10-15% are widely considered to be thriving in the current economy and those that are flat are big growth stories. We consistently have demand for distressed companies and those in need of capital infusions, no matter what shape your company is in, now is the time to look to Private Equity. Finding private equity for middle market companies is what we do, click on the Transact Partners International link ( http://www.transactint.com ) and lets talk.
Have something to add? Your own business wit?
Got a different point of view, want to play devil’s advocate, or just think we’re all wet? Post your experiences or examples.
Now is not the time to be recommending selling to your client. Finance is tight and buyers are being brought deals that they could not have found with great effort a short time ago. Values are suffering. Selling is hard.
Could it be a good time to reevaluate growth through acquisition (even to firms more intent on internal growth or even exit planning?).
Here’s why it might be:
Strong players can make deals that will not be possible in strong markets. Transactions must be made with the finance and terms that are available. Money is tight and owner finance is far more common today than it was two years ago.
Growing companies prior to exit is a pragmatic approach to growing value, especially if the growth is low risk.
Many smaller and undercapitalized firms will accept buyouts on asset based agreements to procure some upside for their business rather than struggle through an unpredictable next year/s and risk losing everything.
Build a smart team,
Create a smart plan from start to finish:
*determine precisely what fits–weighted averages criteria model
*plan for transition and monitoring of all aspects of transaction integration
Build a big list,
Contact everyone with a basic friendly invitation to talk
Manage and track information (use modern tools for data tracking)
Monitor progress and make adjustments