As an entrepreneur, selling your business can be as much of an emotional decision as it is a financial one. Plenty of considerations can and should go into it, rather than just the size of the cheque being cut by prospective buyers. However, in this practice, timing is a crucial aspect too. While pulling the trigger to sell or hold on, is ultimately a personal decision, there are a few compelling factors for why now may be just as good a time as any to put your business up for sale.
- Recessionary risks
2019 saw strong market performance despite being headlined by political and economic uncertainties, as well as rising trade tensions. With this backdrop, it still remains a seller’s market overall. The caveat here though is that markets tend to respond worse to bad news than they do positively to good news. With the overarching issues aforementioned still hanging unresolved, a recession is not an entirely far-fetched proposition. If history is any indication, in such an environment, buyers tend to retreat into their shell until the dust clears, by which time earnings multiples are pushed down due to the prevailing fear of uncertainty. As a business owner, you can take advantage of the current level of acquisition multiples still prevalent that can enhance your return on investment at exit.
- Entrepreneurs’ Relief
In the UK, the Entrepreneurs’ Relief policy enables business owners to pay less capital gains tax when they pursue a business sale. Provided that owners meet eligibility criteria, all capital gains on qualifying assets are taxed at a rate of 10%, which is a strong incentive for business owners to be able to complete a tax-efficient exit. To qualify for this fund, entrepreneurs must be either a sole trader or business partner and own the business for at last 2 years prior to selling it.
- Capital just raring to go
A 2018 study by leading private equity firm Bain Capital published that globally, there is more than $1 trillion of dry powder (defined as institutional capital that has not been deployed into committed investments) available to asset managers. In other words, buyers are still on the hunt for attractive opportunities that they can allocate their capital to. In such an environment, putting your business up for sale can attract significant interest, and if you are the proud owner of a well-run business, there is even better news. Because of so much money chasing quality opportunities, a well-managed business can often attract a bidding war wherein buyers compete with each other in an auction process to submit acquisition bids.
- Cheap financing
Post the 2008 crisis, interest rates were lowered to stimulate greater economic activity by both consumers and businesses. At near-zero levels, there is really only one way for these rates to go over the short- to medium- term. This is great news for buyers as it enables them to obtain debt financing at lower interest rates. This in turn translates to greater appetite for your business as the buyers now have less equity (i.e. less of their own risk) invested in each business.
While hindsight is always perfect when it comes to timing entry and exit points in a business, there are various macroeconomic factors, current policies and other considerations that currently make now a great time to sell your business if you are ready to move on.
Thinking Of Selling Your Business?
1. Is this what you want to hear or what you need to hear?
M&A literature is full of articles noting that valuations are ‘more art than science.’ Reading between the lines, this means that brokers will all value the same company differently. More pertinently for business owners, it can mean that the broker’s valuation reflects the value that the owner attaches to their business rather than a more objective figure. This most commonly plays itself out as exaggerated growth figures. The end result is a valuation which may keep the owner happy but only serves to scare away potential buyers of the business.
2. The use of ‘comparable’ public companies
The ready availability of rich data for public companies makes it easy for business brokers to value their clients’ businesses using metrics obtained from ‘comparable’ public companies. Small- to medium-sized companies are seldom comparable in any way to public companies in their industry. Constantly updated analysis provided by experts like Aswath Damodaran is an excellent resource – just not particularly for private companies. The figures are rarely realistic unless the business broker can provide a watertight rationale for their using them.
3. Over-adjusting financials
Business brokers typically adjust operating income so that it only reflects recurring items. In some cases, this can amount to little more than an exercise whose aim is to massage the company’s operating profit. What’s remarkable about ‘extraordinary items’ is how ordinary they are; a business broker may work under the assumption that a litigation – to take one example of a non-recurring cost – was a one off event. But the next litigation will also be a one-off event. Not accounting for contingencies will ultimately lead to flawed valuations.
4. Misunderstanding what makes the company valuable
An oversight of many business brokers’ valuations is the assumption that cash flow will grow or decline incrementally over a 5-10 year period, overlooking almost all the factors that drive that growth. Their assumption is that the market will grow by 5% and thus, it follows that the company will as well. But it’s seldom that simple. The aggregate market is only one component of a companies’ value – with plenty more decided by changes in technology, strength in IP, management decisions and competitive factors. Failing to grasp where the value in a business really lies will inevitably lead to erroneous valuations.
5. Capital expenditure projections
Misunderstandings around capital expenditures and their effect on free cash flow projections are quite common, even among brokers. This usually arises from a misconception that capital expenditure is a ‘one off’ expense, when, although in many cases it may be discretionary, sensible capital expenditure is a central component of any company’s growth plan. Brokers that overlook this point risk exaggerated DCF valuations based on the flawed assumption that a company’s existing capital can be used to generate above-market growth.
Lee Smith is Managing Director of Verdani Investments who offer fair business valuations whilst safeguarding employees and creating legacy moments for founders.
To find out more and to get a valuation on your business, contact us by emailing firstname.lastname@example.org or calling us.