Timing Issues in Consideration of Sale
Our firm talks with many buyers every week about potential timing for consideration of sale. The fact is that owners “feel like” considering sale when they are afraid of what business profits, and business value will do in the future. There are a large number of owners feeling that sort of pressure today. However, owners know that buyers pay higher purchase price when earnings are strong. So – for the past 3 years, most have been inclined to wait for a bit of upturn in their results before they make the move to sell.
In spite of this, our firm continues to sell good middle market companies. In fact, in most cases, those sales have been at huge premiums, simply because of healthy competition.
The merger and acquisition marketplace will change in the future, necessarily, because of the number of baby boomer owners who will have to consider sale in the coming years. Beginning January 1, 2011, America’s baby boomer generation started turning 65 at the rate of 10,000 people per day. That trend will last for the next 19 years. The Exit Planning Institute has projected that over the next 12-15 years, more than 8 million privately-held US companies will be sold. (This would create an increase in sales per year of more than 10x current estimated levels.) The Wall Street journal referred to this as a potential “tsunami” of private company sales.
Many business writers have been preaching non-stop about the “baby boomer business transition bubble” for some years. Articles in the past year have included:
Supply and Demand: The Baby Boomer Impact on M&AQ
Are Baby Boomers Ready to Exit their Businesses?
Business Valuation: Baby Boomers Tipping the Scales
Baby Boomer Business Owners: Will There be a Mass Sell-off?
The $10 TrillionOpportunity: Designing Exits for Middle Market Business Owners
Baby Boomer Business Owners – A Dilemma
As The Private Business Owner said, “the ramifications of this crisis could be catastrophic to middle-market baby boomer business owners. Simply put, you have a limited window of time before the sheer number of companies hitting the market potentially overwhelms the buyers community, and based on the laws of supply and demand, when supply outpaces demand, prices drop.”
How much could an imbalance of supply and demand really hurt pricing for businesses? It is hard to approximate, and will certainly depend in part about what time in the cycle the business owner may move toward sale – but our guess would be, that in the midst of a trend toward tremendous boosts in seller supply, it could, literally, cut business values in half.
While we understand, and have long agreed with, owner desire to sell when profits are strong, we still feel that the market today will top that of a flooded market in the future, even with less robust recent earnings history. So – when to make your move? If earnings are really on the up-turn, and might increase enormously in the next 12 months – and if those increases cannot be demonstrated in advance – it might be worth waiting. If earnings are flat or are trending up only slightly, today might be the time! If you’re in one of those great industry segments that are on the upsweep, take advantage of it! What are those? Technical equipment industries, pet supplies, infrastructure equipment and support, pharmaceuticals, health care products and services, energy source equipment and services, employment and administrative services, and more. Call if you’d like an assessment, and we’re glad to give you feedback.
Don’t wait until the middle of the surge in sale! Move toward the front edge for pricing advantage.
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