Welcome to the first of six columns on the ultimate sale — the sale of your business. In this column we’ll examine whether you should now consider “monetizing” what is probably your largest single asset.
Forthcoming columns will address how to prepare your company, assemble an effective M&A deal team, enter the market, select the most promising buyer, and close the deal. That covers a lot of ground, so think of these columns as your handy sellside pocket guide.
Successfully selling a business is different from successfully building one. But the good news is that, while the process has its own quirks and shoptalk, much of it yields to common sense. Fortunately for you, you’ve already got common sense. You used it to create your current business.
To know if now’s the time, we’ll start by reviewing your attitudes and circumstances. Then we’ll look at the state of the M&A marketplace in general.
You, You, You.
So are you ready? Answer the following questions to find out:
- To reach the next stage of growth you need resources that exceed your current capacity. Say you’ve got a world-beating product but nobody knows about it. Speed is important. Want to hook up with the marketing resources of a bigger, recognizable brand?
- Would selling your company generate enough to fund an attractive lifestyle? For that matter, have you thought about what an attractive lifestyle is?
- Are you bringing less energy and joie de vivre to the job than you did 10 years ago?
- Are there technological or industry developments that threaten your business model? For instance, is cloud computing hanging over your packaged software applications business? Is consolidation creating competitors with scale advantages that are squeezing your margins?
- Said more generally, will it be substantially harder for your company to put on a second act as impressive as its first one?
- Do you have better or more diversified uses in mind for the capital locked up in your business?
- Are you done proving something? That is, can you point to what you’ve accomplished with pride and feel that future company challenges are mostly mundane?
- Is it clear that your children won’t eventually take over the business?
- Have you received unsolicited bids to purchase your business?
- Would your company’s products or services fill a valuable gap in a competitor’s line-up?
Of course, this isn’t a list of all relevant questions. But whatever they are, they all have to do with crossroads. If you answered yes to one or more of the most common ones above, the situation augers well for considering a transaction.
Of course, there are also situations that argue against selling. Among the most common are:
- Have sales been continuously declining for reasons you understand and can fix? If so, hold off selling the business until you can prove you’ve recovered. On the other hand, if you don’t know how to fix the problem or it will be expensive to do so, you may be better served by going into the buyers’ market now. Just be aware that only a subset of all possible buyers is willing to “catch a falling knife,” and they’re more likely to administer you a haircut in the process.
- Are you running a young company and have yet to establish a solid upward sales and/or profit trend? Ideally, you’d sell after that curve has inflected into “takeoff” mode but before the rate of change has begun to decline.
- Have you established clearly ramping sales but, not surprisingly, your SG&A expenses are much higher than normal, depressing EBITDA? In other words, have you yet to get your money back on high marketing and administrative expenditures made in anticipation of increased sales? While there are exceptions (like with Internet-based companies where the economies of scale are so evident that buyers value market share above all else), for more down-to-earth businesses, you may find it prudent to sell after EBITDA has demonstrated at least the beginnings of recovery.
The current and maybe future M&A environment
Now we’ll check out the health of the M&A market. We want to know if today’s transaction volumes and prices are conducive to the prompt and full-valued sale of your business.
Keep in mind that what follows is about general trends only. To determine more precisely what your company might be worth today, talk to a competent investment banker. That is, unless you need to produce a value for estate planning or intra-family transaction purposes. In that case, hire an appraiser or valuation expert. Their values are different from the market-based values produced by M&A advisors.
The appetite of acquirers generally tracks positive GNP growth. Interestingly, though, M&A activity typically lags GNP recoveries. That’s probably because many prospective sellside targets fighting their way out of a downturn are stressed and therefore look risky to outsiders. Who knows how they’ll turn out? In the event, buyers don’t feel confident enough to offer strong values or sometimes any value. As for sellers, they’re typically preoccupied with regaining lost ground and/or decide to wait for a stronger valuation.
So where are we in the M&A cycle now? Considering GNP is only up about 6 percent from its recession nadir in mid-2009, M&A action has been surprisingly strong.
Let’s look at deals worth $500 million or less, what we’ll call “mid-market” deals. They’re more likely to be relevant to your situation than, say, Skype’s sale to Microsoft for $8.5 billion. In 2010, the total value of US mid-market deals was $225 billion, nearly as high as 2006.
2010 also beat all prior years through 2006 on the number of deals closed, 5,000. In sum, 2010’s M&A performance across U.S. industries has been rather remarkable. Average transaction values haven’t been what they were before 2008, but they’re close.
Note, though, that the first quarter of 2011 saw a material decline in both deals done and total value. It’s not yet clear what caused this, perhaps a rush at the end of 2010 to beat anticipated capital gains tax increases, or perhaps a growing fear that the recovery is stuttering.
At any rate, three industries in particular enjoyed strong 2010 M&A showings — financial services, information technology and healthcare. About 1,700 financial services industry transactions occurred last year, a steady year-over-year increase since 2006 when about 630 deals closed. The aggregate yearly value of these deals in 2010 was $65 billion, way up over 2009’s miserable $28 billion.
For IT, both dealcount and total deal value took a major hit in 2009, but with 588 closes in 2010, the industry recovered to a value level of $31 billion, about where it was in mid-2007.
Like IT, healthcare transactions were punished in 2009 but 2010 saw far more value changing hands at $28 billion, up nearly 60 percent, with dealcounts rising 35 percent to 468.
If you’re in one of these three industries, your prospects for a successful sale remain good. Of course, other sectors aren’t off-limits: a profitable and growing, or at least stable, company in any industry will attract buyers.
