Many business owners are enjoying very good times right now. Their companies are generating excellent sales and profits. Meanwhile publicly traded strategic buyers are trading at record high valuations, motivating and enabling them to pay high acquisition prices. Many privately held companies are also doing very well and looking for growth through M&A deals. Further, financial sponsors are eager to invest, via buyouts, the record trillions of dollars of equity they have raised. Interest rates, though not at rock-bottom levels, are moderate by historical standards. Even the Middle East turmoil has failed to dampen most businesses’ performance, prospects and M&A attractiveness. So, what could go wrong?
The undeniable fact is that virtually all previous “peaks” in business performance, stock market pricing and M&A valuation looked similarly attractive … just before the cycle turned and they no longer did. The history of American and world markets has proven that at some point every “boom” runs its course. It is only a matter of “when it will happen” and “how severe the cyclical downturn will be.” (Please see “Boom and Bust: A Global History of Financial Bubbles” by William Quinn and John D. Turner).
Once we face the fact that booms are not permanent, that business cycles are the way of the world, the question is “what should business owners do about it?” I propose the following steps:
- Work with your financial staff to determine how vulnerable your company and its customers would be to a recession, a slowdown and/or an increase in interest rates. If you have long-term contracts with financially strong clients, fine. However, if you are vulnerable to reductions in demand or your clients’ abilities to pay, then now is the time to shore up your balance sheet and take defensive operating steps.
- This is the time to explore securing long-term financing. Best to lock in the credit availability at current interest rates while still possible.
- If you have contemplated a company sale, then consider moving ahead while the M&A market is still strong. Is it really worth trying to eke out a 5 to 10 percent higher price a year or two from now at the risk of a significantly lower price, or no price at all, in the market’s down cycle?
- If you feel your company is vulnerable and decide to sell, this is the time to opt for cash in lieu of the buyer’s stock, notes or contingency payments.
I have known many owners who failed to take advantage of their businesses’ strong performance in strong M&A markets. They had bad cases of “FOMO,” the “Fear of Missing Out.” This all too frequently resulted in their having to wait years for another attractive M&A market and/or accept a significantly lower sale price.
Business and M&A cycles are facts of life. By most any standard, the current robust stock and M&A markets are aberrations from the norm. The wise owner considers this when planning their business’s operating strategy, and M&A alternatives and timing. ●
Mark A. Filippell is a M&A professional
