In the entrepreneurial ecosystem, business owners looking for an exit strategy are likely to find 2014 an optimal year for selling.- Peter Lehrman, Entrepreneur Magazine
Timing any market is always a tricky proposition, especially in this era of diminishing returns and lowered expectations. The market for selling a small to mid-sized business is no exception.
Anyone considering selling a business, especially boomer business owners thinking about retirement, should have a list of compelling reasons why they want to sell and a plan to help them do so.
For most business owners, the timing will never be perfect, so waiting until the ideal moment to sell could be an impractical course of action. However, certain indicators are pointing to a better than average success rate for selling a business in 2014.
That’s why it’s a good idea to employ strategies right now that will help you get the maximum money for your business.
2014: The “Year of The Seller?”
Three or four years of turmoil in a struggling economy makes some business owners understandably cautious when it comes to optimistic projections for 2014. However, there are some very good indicators pointing to the possibility of a perfect selling environment for at least the next 18 months or so.
• The majority of businesses have experienced increased profitability for the past 2-3 years.
For numerous business owners, 2008-2010 were flat as far as profits were concerned. Those who survived this period felt lucky to break even, much less put profits on the books. With demand down across the country for services and solutions, business owners were unhappily treading water.
However, the recession is slowly retreating, allowing businesses to recover. Many are now in a position to show the three or four years of solid growth that qualified buyers want to see when they build projection models.
The ability for a company to demonstrate upward trends in their financials shows prospective buyers that it is right to make positive projections for future growth. This in turn gives owners better valuations and does wonders to make the deal viable. Buyers want to know that a business they purchase is poised to survive even a serious economic downturn.
• Low interest rates (for a little while longer, anyway)
You don’t have to have an advanced degree in economics to understand that the artificially maintained low interest rates we now experience will soon be a thing of the past. Forecasters have been fretting that the Federal Reserve will be forced to curtail its’ bond-buying program soon.
A growing number of experts now say that 2014 could be the year when that finally occurs. This means, naturally, that waiting too long to sell might mean an owner will see higher interest rates and a lower price for his or her business.
The reason for this is that interest rates always have a direct impact on the price of capital used to purchase a company. Buyers who rely on loans to acquire a business will feel the sting of these rising rates since earnings are used to pay the interest on loans. An increase in the price of capital will almost certainly lead to lower valuations for businesses.
It makes sense that the more expensive it is for buyers to get capital, the less willing they are to pay top price for a business. As soon as rates begin to rise in 2014, there will be a negative impact on business valuations.
• Low levels of debt and lots of positive cash flow
Credit Suisse reported in February, 2014 that 73 percent of U.S. companies and 56 percent of European companies have incredibly low levels of debt on their balance sheets compared to their total market capitalization.
Private equity companies are awash in cash, with nearly $1.1 TRILLION in cash on hand. At the same time, levels of corporate debt are falling to new lows. So, what does this mean for you as a business owner who is seriously considering selling?
Well, for one thing, since all this cash needs to go someplace other than under the CEO’s mattress, private buying groups will be out en masse looking for successful businesses they can buy and from which they can see immediate cash flow.
For another thing, there is a natural mood elevation that goes on when so many dollars are in play.The old saying “a rising tide lifts all boats” is applicable here. Every billion dollar mega-deal that goes down makes every smaller business deal more attractive. Small businesses are sure to benefit from the optimism that comes with any boom.
• Changing demographics are pushing boomers to sell.
The first half of the “Baby Boomer bubble” (2005-2010) has passed. During that period, older Boomers were able to sell to younger boomers, although the success rate was still a mere 3%.
However recent research indicates that the number of boomer owners indicating they wanted to retire increased from 50,000 in 2001 to over 750,000 in 2009.
It is possible we could see over one million businesses go on the market in the next 10-15 years in a transition tsunami. If this holds true, then it makes sense to sell ahead of the herd and reap the benefits of the current buying frenzy fueled by low debt levels and loads of cash.
Even if you think you aren’t ready to leave your business yet, you should plan as if you are. Positioning your business to sell is never a bad idea or waste of time.
By crafting a well-thought-out exit plan, you will be prepared if circumstances (either good or bad) push you to sell, or if you get an offer from a qualified buyer that you just can’t afford to pass up.
You never know, maybe 2014 will be the year you make a profitable transition from your business and start enjoying everything for which you’ve worked so hard.