The Exit Planning Review™ is an opt-in, bi-monthly newsletter published by Business Enterprise Institute, Inc.


This issue is provided to you by Business Exit Planners, LLC Exit Planning Specialist, Michael C. Valdez, CFP, CLU, REBC, AIF.

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Should I Sell My Business Now?
Being Aware of the M&A Market Important to Successful Business Sale

As we have been discussing in the past few Exit Planning Review™ articles, it is important to take into account personal motives and objective conditions when you are trying to determine the best time to sell your business. For owners who toil long and hard to overcome the endless challenges that test the survival and success of their businesses, the thought of someday selling out for a lot of money seems, at best, a pipe dream. A typical business owner in this situation may think, “Who would want to buy my business?”

Yet, as many owners are discovering, the Merger and Acquisition (M&A) marketplace can be receptive to acquiring closely held businesses – maybe even businesses like yours. In some niches, even smaller businesses are able to sell to much larger cash buyers. But the market can be fickle. A number of factors can fuel or damper the Merger and Acquisition mania. These can include:

• Fluctuating interest rates. Low, stable interest rates can provide buyers with inexpensive funds to buy your business. Climbing interest rates can increase acquisition costs and dampen buyer enthusiasm.
• Availability and pricing of financing. The availability and cost of financing can directly impact deal activity. When financing is readily available to buyers at attractive rates, deal activity can become frenzied because buyers can leverage their equity investment. For example, instead of requiring one dollar of their cash for every $2 of financing (in 2001 timeframe), in 2005, they could borrow almost $4 for every $1 of their own. This means they could pay more for businesses and this is the point in the M&A cycle when it may be favorable for owners to be poised to sell their businesses.
• The current state of the economy. A healthy economy tends to encourage investor confidence and a greater willingness to put money in otherwise illiquid businesses. A stagnant or contracting economy can depress valuation, thereby creating favorable conditions for a buyer’s market.
• Corporate earnings overall and in your industry. Strong earnings can provide cash and the tendency for future cash availability; weak earnings tend to portend the opposite.
• Stock market value. To keep corporate earnings ever-increasing, it can make sense for publicly owned companies to acquire closely held companies whose price/earning ratios are lower than the acquiring company.
• M&A currency. When publicly owned stock is trading at high earnings multiples, it can make sense for those companies to use their stock for acquisitions. As the stock market contracts in value, it can be a reasonable expectation for a chilling effect on the M&A marketplace.
• Supply and Demand. According to a 2005 PricewaterhouseCoopers’ survey of 364 CEOs of privately held, fast-growing companies, “nearly two-thirds . . . plan to move on within a decade or less; 42 percent within five years, and 23 percent in five to ten years.” (“Wide Majority of Fast-Growth CEOs Likely to Move On Within Ten Years, PwC Finds.” January 31, 2005.) If these owners, and others like them, follow through on these plans, there could be a glut of companies on the market, resulting in lower valuations and a buyer’s market.

It is important for owners to be constantly aware of the condition of the M&A market. If it is healthy, owners may have the opportunity to adjust their personal timetables to take advantage of it. When the M&A market is favorable (a lot of buyers offering high multiples), you need to recognize that adjusting your “ideal” departure date can be a whole lot easier than adjusting your financial needs. Conversely, when markets shut down, your personal goals may need to likewise adjust.

Whether you find yourself leaning toward selling your business now or in the future, today is a good time to call our office to begin creating a plan for preparing your business for your eventual exit. We can help guide you through the process of reviewing all of the factors associated with exiting your business and creating a comprehensive Exit Plan that addresses all of your personal and business objectives.

Subsequent issues of The Exit Planning Review™ discuss all aspects of Exit Planning. The provider of this Newsletter (Michael C. Valdez, CFP, CLU, REBC, AIF) offers you unbiased information about what you may need to know — How To Run Your Business So You Can Leave It In Style™.