Guest Post By: Ned Minor
Mergers and Acquisitions (M&A) activity for small to mid-size businesses tend to track with the economy. In the best economic times, middle-market privately-owned companies are gobbled up for frothy multiples. When the economy is down, such as it in now, buyers looking for low prices are plentiful but sellers waiting on the sidelines for values to go up are few.
Should you sell your business soon?
For the past 18 months, owners of companies hit hardest by the recession have been asking me whether they should sell, knowing that the company’s enterprise value is at an all-time low. These owners acknowledge that they missed previous windows of opportunity, yet they are tired of running their business.
My response has been in the form of two questions: When the economy returns will your sector bounce back? When your sector returns, will your company’s revenue and earnings return to historical levels? If the answer to both questions is “Yes”, then do whatever it takes to weather the storm. Many of these owners are now starting to see definite signs of improvement and are putting their companies on the market.
Advice from a noted economist
At a Visage All City Event in Denver on September 29, 2009, Brian Beaulieu, noted economist and Vistage speaker extraordinaire, stated, “Sell your business during 2011 and 2012, not during 2013 and 2014. Start preparing now for inflation in 2013 and thereafter, which will trigger layoffs.”
I think Beaulieu’s advice is sound, and with the average M&A transaction taking between eight to 12 months to close, now is the time to prepare your business for a sale. Strategic buyers and well-funded private equity groups will be plentiful in 2011 and 2012. Financing is starting to loosen up. Buyers are currently paying multiples of 4 to 6 times EBITDA on a recast basis. The greater the EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) the higher the multiple.
Capital Gains Hike
On January 1, 2011, federal capital gains will increase from 15 to 20 percent and on January 1, 2013, to 23.8 percent. This is in addition to state capital gains rates if applicable. If you have not already started the sales transaction process, it is probably too late to close a transaction during 2010 and take advantage of the current rate. If you are just starting to contemplate a sale, keep Brian’s time frame in mind. Historically. his projections have been highly accurate.
Defining your exit strategy
For ninety-five percent of all business owners, their business is their largest asset. Although these owners enjoy a nice lifestyle, they will not achieve their definition of wealth and financial independence until they sell their business. Every owner will someday leave his/her business. They can go out feet first on a stretcher or sipping champagne celebrating the biggest deal of their lives, the sale of their business.
If today’s valuations and market opportunities will deliver your definition of wealth and financial independence, are you emotionally prepared to sell? If not, are you ready to sell during this coming window of opportunity?
If the answer is no on both counts, then consider taking a step toward your independence: defining, designing and implementing your long/short term exit strategy. If you run your business with your financial end game in mind, you’ll be well prepared to maximize its value during any window of opportunity.
Ned A. Minor is a nationally recognized transaction attorney in mergers and acquisitions, founder of Denver-based business law firm Minor & Brown, author of Deciding To Sell Your Business The Key To Wealth and Freedom and a Vistage speaker. For your complimentary copy of his book visit www.minorbrown.com.