How Selling Your Small Business in a Seller’s Market Just Became Selling Your Small Business in a Buyer’s Market

The key to success in Mergers and Acquisitions is to learn how to evaluate market cycles. Luckily, it’s not too difficult if you know which metrics to study. In this blog post, you’ll learn how to tell the difference between a buyer’s and seller’s market and find out what you should do right now.

The U.S. is comprised of thousands of micro-markets in various stages of growth or decline. Therefore, it’s vitally important for new and experienced business owners to understand market trends on a local level so that they can make the right choices.

If you time markets correctly, you could double your cash flow and equity growth, and retire in half or a third of the time it might take others to do the same thing.

The U.S. government wants to prevent another economic downturn like the 2006-2008 recession. That’s why the Fed has avoided it at all costs with unprecedented quantitative easing. This “free money printing” of trillions of dollars is a false stimulus that’s creating bigger bubbles that will eventually burst – only this time it could be worse and more catastrophic than the financial collapse of the last decade.

This is the real dilemma facing every business owner right now, especially if they are in the process of, or considering, selling a company. Interestingly, a recent article in The Denver Post offers an answer:

Most likely 2018 and 2019 will be the last two years.

This is how The Denver Post described the situation:

According to some economists and financial research firms, 2019 and 2020 will reveal a decline in M&A activity in both the number of transactions and the value of the transactions.

Some economists are predicting a downturn or a mild recession as early as 2019 – more likely in 2020–2021. Therefore, 2018 through 2019 are the years businesses will be looking to maximize their deal structures and values in their exit strategies.

This is vital information if you own a privately held company today. Seller’s markets in M&A do not last forever unfortunately. Most are closely tied to several key variables:

  • Economic growth
  • Stock market expansion
  • Interest rates being at historic lows
  • Tax reform freeing up cash for acquisitions
  • Excess cash with equity firms for investing in privately held businesses

Based on the fact that it takes 9-14 months to close a transaction with an optimal buyer (the kind of transaction every business owner should strive for), you should start today learning as much as you can about how to sell a business for maximum value.

It is critical to review historic events and conduct due diligence on the current conditions in determining when the lower-middle market (Businesses valued between $2m – $50m) will begin to shift away from a seller’s market and become a buyer’s market for mergers & acquisitions. Understanding this will have drastic impacts overall valuation for business owners looking to execute their exit strategy.  They say timing is everything – for Sellers, the last 12-18 months was the peak period for this decade. You may be thinking…”didn’t a new decade just begin?” Yes. we are in a new decade. The fact that I just proclaimed that the last 12-18 months was the peak period for this decade indicates that I am either off my rocker or in touch with reality based on recent events and my studies of previous market cycles.

Since the economic collapse of 2008, many business owners have been wondering “When should I sell my business?” The answer is… “You should sell when you can get the most money for your business”. All business owners need to realize they must evaluate both internal and external factors.  From an internal standpoint, a business owner wants to evaluate their five-year historic financial record and make sure the book keeping is clean with strong cash flow.  They want to take care of any unresolved issues, make sure the customer concentration is at a comfortable level, and the management team is in place, just to name a few value drivers to consider.

Once the internal checklist is reviewed, business owners must be aware of the external circumstances for selling their business as well.  And as of March 12, 2020, its a buyer’s market!  Below are my top 3 reasons I proclaim that the Buyer’s Market has begun.

1. The tidal wave of Baby Boomers: The baby boomer generation has begun flooding the market with their businesses and there will be many opportunities for buyers and investors to choose from than ever before.  Nearly a quarter of Americans were born between 1946 – 1964. People born in 1946 are 74 years old.  Yes, the great recession most likely delayed some retirement plans, but the economy bounced back and the inevitable is approaching – The Baby Boomers will retire!  The supply has begun to outweigh the demand, shifting the sellers market to a buyers market.

2. Cycles usually last 5-7 years:  There is much more financial reporting available for the middle market (businesses valued at $50m – $1B) and the M&A market for middle market businesses has experienced significant growth since 2010.  That means we were in the 10th year of a continuous growth cycle for the middle market.  Both buyer appetites and valuation multiples were at historic heights in this 8th year and when the market was hot, buyers became more aggressive.  The market has begun to cool significantly. Buyers have become less aggressive.  They have become conservative in their overall speed of doing deals, lowered their multiples on cash flow, and are looking for less-risky deals.  This can take place in earn-outs, more seller financing, hold-back clauses, and other creative deal structures that favor the buyer and not the seller.  

3. Other Investment Vehicles:  While the M&A world has experienced growth, many other investment vehicles have struggled.  Many still have a sour taste in their mouth about real estate since the economic collapse of 2008.  The stock market has recently lost approximately 25% of its value, and commodity pricing is in the toilet.  With investors looking for a safe-haven to invest their funds in, business acquisition will still be an option.  However, all things go in cycles.  So when the real estate market is back in full swing, the stock market begins attracting more investors, commodity pricing picks back up, and all other investment vehicles regain attraction, investors will allocate their funds accordingly taking money away from the smaller businesses in the lower-middle market looking to sell their operations.  When this happens, valuations will be lowered and more concessions will have to be made by the sellers to complete their exit strategy.

The process of selling a business can be complex and time consuming. An average time frame for the lower-middle market business to sell is approx. 9-14 months.  Therefore, any business owner looking to take advantage of last-minute bargain buyers, the number of active buyers looking for a high cash flow-low risk opportunity, and the lack of businesses currently on the open market should take action now.

In a sellers market, sellers are able to leverage value and get more money.  Just last year, the average market multiple in the lower-middle market across all industries was approx. 4.4.  In early 2018 the average was up to 5.2 with some industries sitting comfortable in the 6 range.  The market multiple jumped quickly; it has fallen quickly too.  Further, buyers now need to avoid risk.  The best way of avoiding risk is to structure a deal loaded with creativity.  Earn-Out Agreements, Hold-Backs, Performance Clauses, etc are all examples of creative deal structuring that usually benefit the buyer and not the seller.  In a sellers market, you see less of this.  In a buyers market, prepare to see more.

So…is it time to sell your business?  It is IF you can still get top dollar for it.

Click here to download a business owner assessment that will help you determine if you should sell now or continue to grow your small business.

Boost Your Business Value

For some business owners, the assessment will recommend holding off before selling their business. By identifying key areas in which your business can improve its value, you can drive your company forward and prepare it for the day the market will reward you. Both the Summit and Crest Training Programs include money-back guarantees. Speak with an advisor after completing your assessment to learn how the training programs will guide you along the path to increased revenues, higher business valuations, and a successful sale of your business.

Click here to download a business owner assessment that will help you determine if you should sell now or continue to grow your small business.

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