Multiple market indicators are sending signals that make this a good time to consider selling a business. Some of those sound, fundamental reasons are outlined below:
First, equity is plentiful.
Both strategic and private equity investors have been stockpiling cash. Public companies currently have over $1 trillion in cash on their balance sheets. Additionally, private equity firms have over $400 billion in committed cash. This money has been sitting on the sidelines for quite some time. It needs – and wants – to be put to work.
Second, there are signs of life in the senior lending business.
Acquisition targets with a minimum EBITDA of $10 million, are seeing brisk activity with total leverage of 4 – 4.25 times, with 3 times senior debt. While these levels are nowhere near historical highs, they are more than enough to drive multiples and valuations higher. In today’s market, increased valuations can bridge the gap between seller expectations and a buyer’s ability to meet that number and still achieve an expected rate of return.
Third, the quantity of acquisitions is currently limited.
This allows for increased focus and attention from potential acquirers. Total M&A volume continued its downward spiral dropping 20% in 2009 versus 2008 and 40% down from 2007. Simply put, buyers have fewer deals to review so they can spend more time looking at deals then they previously did. Buyers are reviewing investment opportunities in areas that they may have passed on in the go-go days of 2006 – 2008.
Fourth, quantity is down but, even more importantly, quality is down.
There is a higher premium being paid to the old adage, “Flight to Quality.” The Great Recession has led to a dearth of high quality assets in general and, particularly, those for sale. This is leading to greater competition for high-quality companies and therefore resulting in higher prices.
Fifth, a sale would be based on the impending increase in both capital gains and personal income taxes.
Traditionally, we have not supported selling a business primarily based on a potential tax increase. However, in light of the overwhelming sentiment that a tax increase is imminent, it must be considered. Taxes in general aren’t going down and specifically the capital gains tax is NOT going down. In fact, it is generally assumed that capital gains will be going to 20% and there are rumors of numbers as high as 28%. This dramatic level of tax increase makes it very difficult for a business to grow fast enough to achieve any additional asset appreciation.
Finally, my father, a stockbroker for more than 30 years, always told me the “toughest thing to do is to know when to sell a stock.” I believe this adage is just as applicable to business owners. My father also told me that you can’t time the market, but should instead look for “market fundamentals,” which should help you know when it is time to take some gains or maybe even stem some losses.