From 2007 through the current time we have experienced some of the more severe economic cycles in U.S. history. As a business seller or buyer, or as a company in need of raising capital in order to restructure or to support growth, the timing of where we may be in an economic cycle can have a dramatic impact on achieving success in any of those endeavors. Below we have provided a summary of the status for each activity as supported by various parties who actively monitor the influences impacting each.
MARKET CONDITIONS FOR SELLING A BUSINESS
In short, it is a “Seller’s” market. To understand why let’s look at the causes. According to Thomson Reuters there were 2,141 middle market transactions, those having values of $1 billion or less, consummated in 2013. That represented the second lowest number of transactions in the past 10 years with 2,003 transactions as the lowest in 2009 and, 3,648 as the highest in 2007. Strategic and Private Equity buyers, however, have an abundance of cash to invest and the debt markets have recovered and are aggressively looking for lending opportunities with cheap interest rates. With an (1) abundance of equity and debt capital, (2) stabilized earnings and a promising growth outlook for middle market companies, as described in the 2013 4th Quarter Report and Survey conducted by The National Center for the Middle Market and, (3) public stock markets at all time highs, the problem becomes a simple one of supply and demand. The culminating result = high prices, or more affectionately known as a “Seller’s” market.
The Private Equity community has been taking advantage of this situation by becoming sellers of portfolio companies, many of which have been held for longer periods than they would have preferred, in order to realize returns for its investors and to meet investment parameter guidelines. Private business owners, on the other hand, particularly if they have companies which are performing and growing, have been more reluctant to enter the market as a seller. In part, this is attributed to some concern of being able to generate reasonable returns on the liquidity they may generate as a result of a sale, which may pale in comparison to what the companies may be earning.
The questions then become, for those private business owners who may be considering a sale at some future point:
- How long will the public market valuations stay at their current levels?
- What is this risk of future inflation and increased interest rates, taxes increasing, increased healthcare costs?
- Should I consider a sale to Private Equity where I can realize a certain amount of cash to securitize my future while having an opportunity to re-invest and participate in the continued growth of the business (known as a leveraged recap) and do I have the energy and desire to do so?
- What are the risks of international economic and geopolitical instability and how might that affect our markets and thus, business valuations? And, for those owners quickly approaching retirement age,
- What is the risk am I willing to accept in the event the economy were to suffer another recession or slowdown? (Many would-be sellers who were riding the economic growth wave prior to 2008 and did not take action found they had to extend their careers or accept lesser values.)
Every seller’s circumstances are unique and different and while there is no single answer as to when it is most appropriate for a sale, it is most important to perform a self-assessment as to what each party wishes to accomplish in order to ensure the best possible results and to understand the dynamics driving market conditions.
MARKET CONDITIONS FOR BUYING A BUSINESS
As a corollary to the “Seller’s” market, current conditions are pricy and challenging for buyers due to the limited number of quality businesses on the market and the competition of buyers. Strategic buyers, especially public companies, have found organic growth challenging and somewhat lethargic. Most have also taken all the actions that they can to maximize profits. In order to generate top line revenue growth they are now looking more toward accretive acquisitions. In a recent poll by EY Transaction Advisory Services of U.S. Executives, 41 percent stated that they planned to pursue at least one acquisition in 2014, which is up from 23 percent in 2013.
A recent Private Equity Digest poll of Private Equity Firms found that while they are actively looking for new investments, they are concerned that 2014 will only be up modestly. Their reasons are due to the limited number of good companies on the market and, the increased interest of strategic buyers who typically can pay higher values.
MARKET CONDITIONS FOR RAISING CAPITAL
Again, as a corollary to the above, Capital is abundant for good businesses. Whether it is senior debt, mezzanine or equity capital, the markets are flush with cash and actively looking for good businesses to support. The banking community, who were scrutinized heavily and forced to increase reserves, restructure and conform to new capital and reporting requirements are mostly recovered from the recession and are actively seeking loan volume. Private Equity and Mezzanine debt is abundant and terms can be aggressively negotiated given the level of competition. If capital for growth is needed, then this is one of the better markets we have seen in several years.
If you, or someone you know, are considering selling, acquiring, or raising capital it is important to understand the current environment, establish specific goals and objectives, and to develop and implement a well thought-out plan to achieve the desired and best possible results. Windward Advisors has significant experience in these areas and can work closely with owners and their other trusted advisors in evaluating plans and can represent the owners in achieving the objectives.