Strangers bearing gifts
With the decline in U.S. asset values, a rising number of transactions are occurring between domestic sellers and foreign buyers. Should the dollar continue its slide, this trend will pick up more speed. The sorts of U.S. companies that overseas buyers like are those with proprietary intellectual property and/or access to rich domestic markets. However, because of the higher fixed costs of closing deals between companies in different countries, size matters. Such deals start to become uneconomic when they’re worth less than about $15 million. If you’re running a business with revenues below this figure, beware the broker who promises access to “thousands of overseas buyers” or miscellaneous Kuwaiti sheiks, especially if the broker asks for big fees upfront. Meanwhile, if you generate sales of more than $15 million and you have the characteristics mentioned above, foreign buyers can be players.
Bubbles
Asset bubbles are both the seller’s friend and nemesis. They occur when the value of a certain asset class rises fast and far above long-term historical comparisons. They are in fact filed with the heady gas of speculative M&A and public stock buying. For a glimpse into two candidate bubbles now abuilding, check out the values placed on social networking companies and — nearly the opposite sort of business — natural resource companies.
Bubbles are your friend when you sell out of them, but your nemesis when you buy or stay in them. That’s when they suddenly pop. Another problem with bubbles is that they take a long time to revisit where they grew up, sometime never. If your business is operating in bubble territory, think closely about an exit.
What’s next?
So much for the current picture. Since selling a company can take about six months, what will the world be like then? Will the creeping recovery have picked up steam, eventually followed by rising animal spirits among buyers?
As in the section above, you’re the boss. Ask yourself:
- Do still-falling home prices, rising energy costs, debt-fueled government spending, a cheapening dollar and chronic high unemployment predict an improving or worsening environment for your company? Are you vulnerable to declines in consumer spending?
- Does the current bull market in equities predict good times down the road? Does it do so frequently or rarely? What do inflating commodity prices mean, especially for metals, fuel and agricultural products?
- Will taxes on the “rich” — notably capital gains and state taxes — go up or down in the future? If you happen to be what the politicians are calling “rich,” should you therefore get out before your butler greets a taxman at the door?
- Are you a baby boomer entrepreneur who missed the chance to sell at a high EBITDA multiple back in 2007 or before? If so, are you now determined to catch the next wave at its peak? Do you feel lucky?
When considering M&A market activity as a factor in deciding whether or not to sell, you may find it helpful to look at the choice as a trade-off between what most pundits forecast will be a mincing recovery in the years ahead versus what other people think is the prospect of a double dip and rising taxes. If your position is that the chances of either thing happening are about equal, is the downside deeper than the upside is high? If so, is that a call to action?
Finally, as you mull over whether to sell, know that some who have gone through the process say they never worked harder in their life. You’re running and selling a business at the same time. That requires commitment and the acquisition of new knowledge. Wise entrepreneurs get help from Sherpas who have trod this path before — experienced investment bankers. Even then it can be a demanding hike. Yet it is often exhilarating and holds out the promise of paying you handsomely for your years of effort and entrepreneurial inspiration.
Next up: My checklist of pre-sale steps that can not only enhance your company’s “curb appeal” quickly, but also add genuine value.
Ryan Kuhn is a partner at Westbury Group, a mid-market investment bank. He has shepherded business owners through the sales process for over 20 years. Beforehand he was associated with a large private equity firm, investing in software and data companies, and before that he ran the M&A department of a Fortune 500 company. He graduated from Harvard Business School with a concentration in Finance. He can be reached at (847) 457-4766 or [email protected].
