Even Though it's a Seller's Market, Business Owners Who Want to Sell Their Company Need to do Exit Planning
Business owners looking to sell their business in 2019 may stand to benefit more this year than past years. High demand and low supply make for a favorable seller’s market. Buyers are active and are competing against each other for quality deals, meaning sellers will have choices when selecting their preferred buyer. This kind of leverage contributes to strong valuations and advantageous deal structures with more cash at close.
Several factors are driving the current market climate, including CEO confidence, healthy corporate balance sheets, record amounts of acquisition capital among both strategic buyers and private equity, and the continued relatively low cost of debt to finance deals.
While it is a seller’s market, surprisingly few business owners take the time to prepare themselves for the M&A process. According to the Q3 2018 Market Pulse Survey produced by International Business Brokers Association (IBBA), M&A Source and the Pepperdine Private Capital Market Project at the Pepperdine Graziadio Business School, 67% of sellers did not do any advance planning before putting their business on the market and nearly a quarter (23%), did less than one year of planning.
What does this mean?
It means that many sellers will have unrealistic expectations about the process and time involved to sell their business. Sellers need to understand it takes about 7-10 months, depending on deal size, to close a transaction. That means even sellers who sign an engagement now won’t be closing their deals until late summer or fall of 2019. We can’t predict where the market will be at that point, but the more advance planning sellers do, the better off they’ll be.
It also means that sellers may not be informed about their true business value. Selling a business for what you think it’s worth versus selling your business for market value may be very different. It’s important to price a business right the first time. Working with a business broker will help business owners determine the right valuation or their company which is critical to closing a deal.
It also means that business owners’ timing may not be the best to monetize your sale for the most profit. Knowledgeable advisors understand what the ebbs and flows of the market and advise their clients on the best time to go to market.
Dating back to the earliest Market Pulse surveys, beginning in 2012, business advisors and brokers consistently report that approximately 49-50% of their engagements closed in a successful transition while half were terminated. This closing ratio is approximately twice the accepted industry standard of anywhere from 18% to 30%, depending on deal size. (Higher value businesses are more likely to sell.)
Beyond a successful closing rate, advisors are generating sale prices at or near expectations. In Q3 2018, Main Street sellers (deals under $2 million) received 89% of the asking price while lower middle market sellers (deals under $50 million) earned 99% of the pre-set benchmark.
If business owners looking to sell their business next year are pondering their New Year’s resolution – a one good would be to work with a business broker to start exit planning early.