August 27, 2021
Unless you’ve been residing under a rock, you’ve no doubt noticed the value of real estate, exotic cars, collectables, and other inflation-hedging assets are at all-time highs. Among those “in the know,” there is definitely a flight to quality, flight to security, and move to control one’s own destiny. Why is that? Why now? And what can you do to be on the winning side of this trend? We’ll touch on some of these questions as we explore a few of the reasons why we are in a historic “Seller’s Market” when speaking of selling privately-held businesses.
To set the stage, it’s important to note that in the normal ebb and flow of business cycles, there’s always a Seller’s Market somewhere. However, for deal activity associated with most privately-held businesses, statistics indicate that buyers have the upper hand about 75% of the time. I shouldn’t have to work hard to convince you that we are NOT in what anyone would consider “the normal ebb and flow of a business cycle” right now. We are in completely unprecedented times. Market-altering factors such as private equity cash stockpiles, corporate share buybacks, near-zero interest rates, sweeping/generational tax code modifications, government manipulation of the free market, military unrest, and overall fear and uncertainty are “why” we are in such historic times.
Consider that in the first 6 months of this year, North American private equity firms broke all previous fundraising records for raising new money earmarked for their investment funds that acquire and grow their portfolios. In those two quarters (6 months) alone, 401 investment funds raised $297,000,000,000 (297 billion). Think about how much they must have raised over the last 3 years if they brought in that much new capital in just the past 6 months! With a 3- to 5-year investment horizon in many of those funds, this is where much of the capital to buy businesses originates. Now consider that business owners are rightfully uncertain of the current inflation and taxation effects on their retirement years since the formulas we’ve all come to regard as common retirement planning wisdom may need serious modification. When you combine all that capital looking to be deployed with business owners who are uncertain about making big decisions, you get a supply squeeze. This supply squeeze has happened because there aren’t enough quality privately-held businesses coming to market to absorb all the available capital. The effect has produced a spike in multiples being paid for these businesses.
All that sounds logical and is absolutely true, but now let’s add in the effects of low interest rates. You see, all the minting of new capital at the Federal Reserve has added to this valuation bubble, too. When the Fed increases the money supply, it pushes that new money into the economy through bank loans, bond purchases, and equity purchases. Banks must find a way to deploy these funds, which has driven interest rates down. Therefore, cash-flush buyers have figured out that they can juice their return on invested capital through the leverage of borrowing cheap funds from commercial banks, which has the effect of tripling or even quadrupling the trillions of dollars raised. All of this results in another huge wave of capital looking for a home.
Now that we’ve discussed where funds are coming from, let’s turn our attention to the owners and shareholders of privately-held businesses. These folks are the engine of the economy infrastructure. They understood the rules before all these changes. Some have made the wise choice to exit now – ahead of heavy tax increases, before the effects of a changing landscape threaten to disrupt their market position, and before the market in their sector becomes saturated with similar businesses for sale (which balances the scales for buyers).
Right now, the fear and uncertainty most business owners feel is holding them back and keeping them from taking necessary steps to maximize what their business can do to secure their future. There’s never been a time when so many valuation-affecting variables have collided in the Seller’s favor, and this window of opportunity won’t last. Unless you plan to operate your business for another 8-10+ years AND you believe your profits will scale faster than the effects of inflation and taxation, I urge you to find a transaction advisor whose processes and experience match the environment in which we find ourselves. Meet with them to discuss your specific situation and exit requirements. Then if it seems to make sense to move forward, get a fair market valuation to confirm everyone’s theories. Only then will you know if selling your business in this historical period is the best thing for your personal security.
If any of this resonates with you, we encourage you to take our Sellability Assessment 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 Business 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.