May 16, 2022
I’m getting real today, and if just one business owner picks up on what I’m saying, then it will have been worth it. The hard truth for many business owners is: If you plan to wait a few years to sell your business - even if it grows, you might clear less than if you sold it now.
Let me explain.
We are currently in what feels like the back end of a unique era in M&A. Like I wrote in August of last year, “Why Is This a Historic Seller’s Market?,” we’ve been in a bull market for 12 years (until this quarter). We’ve enjoyed historically low interest rates for quite some time. The government has been minting and distributing cash like no other time in history. The tax code, while not awesome, has probably been at its lowest in your lifetime. PPP and EIDL loans were a windfall for many businesses. Professional business buyers like private equity, family offices, and others have been on a spending spree. All of these forces combined have made the last several years the best in history from the standpoints of M&A transaction volume and business valuations.
However, in the words of Geoffrey Chaucer, “all good things must come to an end.”
There is real concern that the current window of prolific M&A valuations is steadily closing. We just had a rate hike of 50 basis points by the Federal Reserve, and lenders tell us they have eight more consecutive rate hikes baked into their forecasts. Fears are that after mid-term elections, regardless of who prevails, the only way to stop the spiral of inflation is to raise taxes on certain classes of citizens and let investment asset values plummet back to reasonable levels. Because you are reading this, you are likely in one of those unfortunate classes. The supply chain is bottlenecked, and economists tell us it may take up to six years to straighten out the impairments that have happened over the last 12 months. War abroad has introduced uncertainty for many commodities and raw materials. China is threatening to take over Taiwan. And an aging US business owner population means that more privately-held businesses are expected to come up for sale in the next decade than ever before, making supply plentiful for buyers. Plentiful supply and weakening demand will allow these buyers the luxury of being very selective.
My worry for many business owners is that if you wait to sell your business in the wake of constricting circumstances like those mentioned above, valuation multiples will be down. Interest rate and tax effects on ROI, as well as supply and demand forces, will be working against you. Even if you grow your business over the next few years, the question now is: “Can you grow it enough to outpace the devaluing effects of overarching marketplace conditions?” For some the answer is “yes” - it’s worth the gamble. But for many, dare I say most, you’re looking at clearing a lower figure if these market forces play out as many pundits believe they will.
So, what should you do?
At GaP, we believe knowledge is power. Knowledge arms you with the facts necessary to make decisions with clarity, which in turn opens options. In this business climate and seeing potential challenges on the horizon, my advice to business owners who think they may want to retire in the next 1-5 years is to get a third-party, M&A-focused valuation now. Learn whether your business is one that is likely to outpace a value erosion the market may be throwing our way and see if it has what it takes to outperform these challenges. Learn how better understanding your trailing twelve-month metrics can help fine tune your management focus and discuss with a professional whether waiting is truly the best plan for you.
I don’t want you to be that person who could’ve gotten out on top but waited too long and rode the wave back down. To watch a business owner fail to understand macro forces and adjust accordingly is painful because company value evaporates, changing the owner’s legacy.
We know there is still time to exit at the top before outside, value-eroding forces take their toll. Therefore, I’m encouraging all my business owner clients and friends to get an updated, post-Covid valuation now so they can be proactive in exit planning, whether that is several years away or sooner.
If any of this resonates with you, we encourage you to take our M&A Discovery Questionnaire and talk with us to see if your business makes the cut as one who can still command a great exit in this M&A environment. We will be in touch quickly to discuss the results. Click here to take the assessment.
Gilbert & Pardue Transaction Advisors (GaP) is a Houston-based business advisory firm serving lower middle market and middle market business owners from coast to coast through representation for Mergers & Acquisitions (M&A).
Matt Gilbert and Bret Pardue established GaP to provide owners of lower middle market and middle market businesses – those businesses generally enjoying annual revenue of $10-$75 million – with the quality of M&A representation and value-enhancement services previously only available to upper middle and large businesses. GaP brings highly experienced executives, sophisticated financial and marketing products, proven-effective processes, and fully-integrated expertise to every engagement. No other M&A firm serving the lower middle and middle markets provides the quality of representation and transactional expertise that we do.