The current economic environment has business owners feeling cautiously optimistic. Many are coming off strong years despite the incredible volatility. Through the pandemic and its fallout, balance sheets have largely remained positive for business owners who were prudent, careful and leaned into the challenges.
But despite successfully leading their businesses through a challenging period, many owners are leery of how 2023 is shaping up economically. The signals from the market give an uncertain picture of the likelihood that the U.S. will experience a recession this year. That has owners unclear on how to strategize regarding major moves, such as the transition of their business through a sale.
Smart Business spoke with Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank, about the M&A market and what it means for business owners considering the sale of their company.
How are market conditions affecting owners considering a sale?
Baby boomers are exiting their companies at an increasing rate, many spurred on by the challenges of the past few years. Additionally, the M&A market has, since late 2020, favored sellers. In fact, 2021 and 2022 broke records for deal volume and deal value, with most companies selling quickly and for higher-then-expected prices. This year, however, M&A activity is expected to slow, which is causing some owners to pause and reconsider whether they should sell now or wait until conditions once again swing in their favor.
Given the strength of the M&A market over the past decade, many business owners tended not to strategize their exit because the predominate sense was that they could sell their business at any time and realize a significant return — that there was little need to think about it. The volatility that followed after COVID, however, is sending the signal that business owners need to be more tactful about how they approach the sale of their business. It’s encouraging many to sharpen their pencils and think carefully about a potential sale.
What planning should business owners engage in before exiting?
Much like selling a house, business owners have a lot of clean-up to do before taking their company to market. It’s a great deal of work — many owners who have been through a sales process say it’s like having a second full-time job — so, owners should begin preparing at least three years ahead of the date they’d like to exit their company.
While there are many tasks to complete before putting a company on the market for a sale, one thing those thinking about transitioning should address is the emotional aspect of transitioning from a closely held business. For some owners, their business was a large part of their identity. Once they leave, often they’re challenged to determine what they’re going to do, what post-ownership life means for their family, etc. Further, many businesses have long been a staple in certain communities and a sale can draw significant public attention, which could have implications for the family. It’s important for owners to think through their post-sale transition. Have a plan for what comes next. It can happen that an owner takes the business through the entire diligence process but can’t sign the agreement because they’re unsure what they’ll do next. That emotional unpreparedness hurts everyone involved.
Who can help owners through a sale process?
Good advisers, engaged early, can help owners navigate the many challenges a sale process brings. Engaging with professional M&A advisers — an attorney, accountant, investment banker, wealth adviser — very early on creates efficiencies and opens up possibilities. They can help not only get the business prepared and help identify the right buyers, they can also help structure the sale to be tax efficient and maximize the impact of the once-in-a-lifetime liquidity event.
Despite the economic volatility, there are always good reasons to transition a business. Even in a recession, with the right advice and preparation, sellers can maximize their company value in a sale.
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