16 Oct Suddenly, it’s a business sellers market
Published in Tulsa World
October 16, 2011
By David L. Perkins, Jr.
It’s a surprise to many, but now is a great time to sell a business. Premiums are being paid.
How can this be?
First, there’s a massive supply-demand imbalance – lots of buyers and not many sellers. Private equity groups and strategic buyers are as aggressive as ever and hunting for acquisitions, but many would-be sellers are waiting due to the false belief it’s “not a good time.”
Second, the cost of debt is at an 80-year low. Shockingly low. Business purchase transactions are funded primarily with debt. Lower interest rates mean higher prices can be justified without sacrificing return on equity. And yes, commercial banks are lending.
Deals are getting done. Transaction volumes for 2011 are well ahead of last year’s pace, according to Mergerstat.
Third, taxes rates will probably never be lower. Wait a few years to sell and Uncle Sam will likely take a much larger bite.
Valuations continue to be based on the proven profit-generating ability of the business, and although prices – or “multiples” – are higher across the board, a healthy spread remains between deals – depending on the characteristics of the business. In addition to consistent profits, buyers tend to value customer diversification; management teams that are proven, stable and willing to remain; growth; niche products and markets; strong brands and proprietary products; growing industries and size.
Yes, larger businesses – in terms of revenues and profits – go for higher multiples.
Businesses with annual profit under $1 million are generally being purchased by individual buyers who live in the geographic vicinity of the business. These buyers will almost always run the business they purchase, and they can be a little harder to locate as they swiftly enter and exit the market. They can also be a little more of a challenge to work with. Most are inexperienced at buying.
Businesses with higher profits will tend to sell to private equity groups or industry buyers. These buyers are easier to find because they tend to stay in the market for long periods and make efforts to make themselves known.
What’s the key to getting absolute maximum? Very simple: multiple buyers “worked” simultaneously, with urgency. Multiple bidders push values higher, and offer prices will align themselves along a bell curve. Only by having all the offers on the table at one time can the seller identify the one that’s “furthest out to the right,” and choose it.
Important as well, by dealing with all the buyer prospects simultaneously the process is significantly shortened, which is critical for confidentiality. Start the process and complete it quickly.