November 18, 2022
Many successful business owners assume there will be a buyer ready, willing, and well-capitalized when they decide to sell their business. They also over estimate how easy it is to sell a business. I agree there will always be buyers for successful, well-priced, privately-held businesses, but I disagree emphatically with the assumption that the process will unfold easily. Owners who have successfully exited all concede that the process is intense.
Over the last 12+ years, the United States has enjoyed a historic bull market, and business owners of all types and sizes have benefited greatly. In fact, business valuations during the last 5-6 years have been way beyond historical norms. In my experience, this trend has influenced the opinion many business owners have regarding the value of their companies. One noticeable fact is that most owners I’ve met ardently believe their company should trade at the top of the value range for their industry or peer group. They also believe it will sell quickly and that there is less risk associated with purchasing their business than actually exists.
In today’s climate of rising interest rates, political uncertainty, high inflation, supply chain concerns, labor challenges, and a seeming liquidity crisis – who in the heck would buy a business? This is a question I hope every business owner considers as I lay out the buyer universe below.
• Financial Buyers: These include Private Equity Groups, Family Offices, and Investment Pools/Funds. You can think of buyers in this group as entities who are seeking two main things: (1) a return on invested capital and (2) growth in the value of the underlying asset. Buyers in this group generally do not want to be involved in running day-to-day business operations; therefore, a business owner generally needs to have that aspect of the equation solved before being able to attract their serious attention.
• Competitors: Many companies look to acquisitions (that offer new offerings and new geographies) to drive growth when the economy and market forces are contracting. Overlapping overhead expenses can often be eliminated to increase margins, and cross-selling can improve penetration.
• Vendors, Suppliers, and Adjacency Plays: Your business may be a natural acquisition for one of your vendors or suppliers based on the strategic initiatives of their organizations. Similarly, a business serving the same customer base may be interested in an ‘adjacency’ where products and services are complimentary. A merger or acquisition can result in vendor reduction, supply chain efficiency, and a larger share of the customers’ wallets.
• Individuals and Search Fund Professionals: If your business is on the smaller end, an individual may be your buyer. Many corporate middle managers have amassed a 401(k) and other savings large enough to leverage an SBA loan (up to $5M). Search fund professionals are typically MBA-holding corporate managers who have built an acquisition thesis that financial sponsors are willing to fund.
• Public Companies: This is self-explanatory, but we’ve seen public companies make acquisitions simply to eliminate a competitor. In other instances, public companies have acquired privately-held businesses in order to boost human resource talent, gain intellectual property, secure key customer or supplier accounts, or enter new geographies.
• Foreign Entities: Foreign buyers across the globe are suffering from weak markets and weakening outlooks; therefore, many actively desire to invest in US-based businesses in order to diversify or penetrate a new market. This group is on the rise and cannot be ignored in certain industries.
• Internal Parties: Management teams are often a business owner’s preferred buyer. Many funds have sprung up to equip existing management teams with the capital and Board-level horsepower necessary to purchase a controlling interest. Employee Stock Ownership Plans (ESOPs) and other similar mechanisms are also exit avenues to explore depending on your specific situation and your state’s rules.
• Family: Some businesses have a family member interested in and capable of successful ownership transition.
As you might imagine, not all businesses can be sold at the top of their industry value range. Statistically speaking, most businesses trade in the middle quadrants. Added to that, successfully selling a business is one of the toughest things most people ever complete in their lives. It takes an average of nine months to achieve the desired outcome and perhaps even longer now with buyers having to accept increased amounts of risk. All the market forces impacting the current business sales arena are taken into consideration in a buyer’s risk assessment and anticipated in their ROI hypothesis. Buying a business in 2022 and 2023 is a far trickier endeavor than it has been over the past 12 years, and sellers need to empathize by adjusting their expectations of both the process and the outcomes.
This doesn’t mean your business cannot trade at the top of your industry value range. When conditions get funky like they are today, fewer businesses come to market. Out of those, many are battle-scarred, providing the perfect scenario in which to compete and win. Simply put, when there is a large pool of buyers and a small number of businesses for sale, your business could get the opportunity to stand out from the crowd and garner a lot of buyer attention. Acquiring your business could be seen as a better option than most other capital placement choices in a market where buyers are hungry to put sidelined money to work. This scenario could spark a competitive process which might lead to exceptional results if orchestrated correctly.
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-$80 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.