Friday, July 14, 2017

2017 is a Seller's Market; If You Want to Sell, Now is the Time

We are frequently asked, "when is the best time to sell my business?"  There are many factors that go in to answering that question but they generally fall in to two broad categories:  Internal Factors and External Factors. 

The internal factors are factors that relate to the specific circumstances of the business and the business owner(s).  Some of these factors include where the business is in its lifecycle, the level of profitability, growth trends, the age and health status of the owner(s) and their need or desire for liquidity and the owner’s desire to reduced business risk.  These are topics we will discuss in a late article.

Today we want to discuss the external factors that are in play today that make 2017 possibly one of the best times to sell a business in last decade.  If you have been thinking about selling, we believe now is the time to pull the trigger.

Why are we so optimistic about the market opportunities today?  It does not happen very often but it seems that the stars are aligned to maximize value for the selling owner.  This is truly a “Seller’s Market.”  Here are some of the factors that lead us to this conclusion:

Business Expansion – We are in the 9th year of the current business expansion.  I would be the first to acknowledge that it has not been the most robust expansion but that slow, steady growth is one of the reasons it has lasted so long.  Most businesses are performing as well now as they have at any point in the last decade.  In addition, most businesses have had a steady continued growth in revenues and profitability; two extremely important factors that increase value in the eyes of the buyers.

Economic Cycle – Synonymous with the business expansion described above are the economic cycles that are inevitable in any economy.  We are clearly still in a growth cycle but it will eventually turn the other direction, it is just a matter of when.  It is always better to sell a business during a growth cycle because at that point in the cycle the outlook for the buyer is better and they perceive less risk in the acquisition.  The perception of less risk for the buyer translates in to a higher price for the seller.  We don’t know how much longer this expansion will last so sooner is better if you are thinking about selling in the next several years.  If your industry is particularly susceptible to economic cycles, like home building or the related lumber and building material distribution business, then this is even more of a concern for your business.

Cost of Capital – Although we are beginning to see interest rates increase slightly they are still at historic lows.  Prime rate is currently 4.25% and 3-month LIBOR is only 1.30% both of which represent relatively cheap funds for business purchasers.  When buyers can access inexpensive capital like this to complete business acquisitions their overall cost of capital is lower.  As you know, a lower cost of capital equals higher value for the seller.  As interest rates continue to rise and the buyer’s cost of capital goes up the same business generating the same level of cash flow will become less valuable to these same buyers.  If the economic down turn is just around the corner, your business may be worth more now than it will be for many years to come.  

Access to Capital – Closely related to the lower cost of capital is the abundance of capital available for acquisitions.  Generally speaking, strategic buyers have benefitted from this long and profitable economic expansion resulting in reduced debt, stronger balance sheets and more cash reserves available for acquisitions.  Similarly, private equity and sub-debt funds continue to have successful fundraising experience and consequently have an abundance of capital available, specifically for business acquisitions.  Thirdly, the bank lending market is still hungry for loans and are anxious to lend for business acquisitions.  Consequently, buyers have access to the equity and low-cost debt-capital to fund desirable business acquisitions.

In summary, the access to abundant and low-cost capital and a continued business expansion makes 2017 a ‘Seller’s Market.”  In addition, avoiding the inevitable cyclical downturn that is certainly in our future makes 2017 the time to go to market.

When selling a business, engaging the right advisors is critical.  Here are just a few reasons why Mt. Vista Capital is the right M&A advisor for your business.
  • A team of senior transaction advisors that handle the transaction from inception to close; no hand-of to junior associates.
  • A broad cross section of industry experience including manufacturing, distribution, business services, technology, etc.
  • A dedicated focus on serving the needs of owners and shareholders of privately owned middle-market companies, small-cap public companies and orphaned divisions of public companies. 
  • A proprietary transaction process designed to bring multiple buyers and maximize value.
  • The ability to provide in-house business valuations.

We are pleased to offer a complimentary business valuation analysis to any business owner that is considering a sale transaction in the next year or two.  Please feel free to contact us to discuss any of your specific valuation or transaction questions.

Alan D. Austin, CFA

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