When we sell a stock in the open equities exchange, we feel like we lost if that stock appreciates in value after the sale. When selling all or a portion of a business, however, the success of the business after the sale is perhaps the greatest indication that the business was sold at the right time, for the right reasons. Let me explain by discussing business sale timing from several points of view.
Health of the Economy – Good businesses sell quickly and for top dollar when economic conditions are positive. Just prior to the Great Recession of 2008, merger and acquisition activity was very strong and sale prices (usually multiples of EBITDA) were high. Once the recession started, merger and acquisition activity came to a rapid halt. In fact, buyers quickly abandoned deals that were days or even hours away from closing once the recession began. Many sellers, who had worked their entire lives to build healthy and thriving businesses, were left with unmarketable, depressed entities virtually over night. Some didn’t survive until the economy improved. On a more positive note, once several years past and buyers once again became confident in the economic future of business, deals began closing again and values started escalating.
Health of Your Industry – Similarly, good businesses sell for high values when the health of their industries is strong. The most notable and recent example of this is the oil & gas industry. Until the fall of 2014, oil & gas deals were selling for all-time high values since the future of the industry seemed invincible. Because business was so good, many business owners delayed selling since so much money was being made. And then oil prices started falling like never before, the drilling rig count fell by more than half, and investors ran from oil & gas acquisition opportunities. Oil & gas business owners (service companies in particular), in the meantime, were left scrambling for what little work was left in hopes of simply keeping the doors open. Many owners, whose businesses only months before were worth all-time high market values, sadly and simply closed their doors after decades of service as their businesses were worth only the auction value of their equipment.
Health of Your Business –Strategic and financial buyers acquire healthy, well-run businesses. On a graph, the quality of a business over time often looks like a bell curve. During the start up phase, the quality is usually low as the business owner works day and night to begin the venture. Then, as time goes by and the business matures, the quality of a good operation rises and remains high in quality over a period of time. But without good planning and foresight on the part of the business owner, sometimes the quality of the business deteriorates as the business owner ages finds it increasingly difficult to stay ahead of the ever changing demands and challenges of growing and running a business. Simply, the business owner maximizes the return on his/her life’s work when the business is sold at the high end of the bell curve just described. Conversely, when the business owner waits until the final stages of the latter stages of the described quality-cycle, the market value of the business is much less as a result.
Health of the Business Owner(s) – Often in the lower-middle and middle market, a business is largely dependent upon the business owner(s). Employee and customer loyalty, lender confidence and support, and trade secrets (to name just a few) are often byproducts of the owner’s level of commitment to the business and the energy and enthusiasm level it takes to sustain such momentum. When a business is dependent upon the owner for continued, successful operation (and most are), the seller will often require that in order to receive top dollar for the business, the owner must be willing and able to stay onboard for an extended period of time to ensure a smooth and successful transition. Further, savvy buyers will even tie a portion of the purchase price to the future success of the business so as to ensure the owner’s continues, full-time involvement. Therefore, a smart business owner will begin the sale process at least 3-5 years prior to the date of their ultimate retirement goal and not wait until total burn-out has set in and the desire to continue on in the business has all but left.
When selling all or a portion of a business, timing is everything. So back to the analogy above, when a business continues to thrive after the sale, it is an indication that the business owner sold when the health of the economy, the industry, and the business were all positive and the owner had enough energy remaining to continue working with the buyers to ensure a successful business transition. Mission accomplished.
» Aaron Edwards is chief operating officer for Strategic M&A Advisors in Madison.