As the new year approaches, the current market for selling almost any business is as favorable as it has ever been. Purchase price multiples paid (valuations), how purchase prices are paid (cash, seller note, earn-out, equity roll-over), and legal agreement terms (post-closing risk) are all weighted toward the benefit of the business owner selling their company. These outcomes and trends have been driven by several factors.
Top Four Business Sale Drivers
- Debt capital from lenders is plentiful and cheap; this is needed to support transactions.
- Many businesses have thrived during the pandemic, contrary to initial fears, which has created ample liquidity for companies that have a desire to purchase other businesses.
- Stimulus money was eagerly handed out to business owners to increase their confidence and aid their cash coffers during pandemic shutdowns, regardless of whether a business was negatively impacted by the pandemic or not. This created even more liquidity for businesses that desire to purchase other companies.
- Private Equity Funds continued to raise record sums of capital during the pandemic.
When you add all of these primary drivers together, you are left with what we have now, which is more demand for deals than there is supply. In any market, when demand is greater than supply, economic benefits almost always shift to the supplier. In this case, that is the business owner.
How Long Will These Favorable Trends Last?
This is interesting to ponder, as there are many factors that support a strong demand for years to come. However, buyer demand can be impacted by the quality of supply. If businesses begin to see noticeable deterioration in their earnings stemming from poor economic factors, supply shortages, an inability to pass rising costs through to customers, or prolonged periods of labor shortages that impede the ability to produce goods or services, buyers will naturally begin to become more reserved and cautious, causing demand to suppress. Lenders may also become more reserved if this climate were to occur. Reserved attitudes from buyers coupled with increased caution from lenders could negatively impact demand, which could alter the favorable climate we are seeing in today’s market. Although these factors are certainly very real variables in the current business climate, the fortunate truth for sellers is that demand and the associated premium environment have yet to take notice, particularly because earnings from businesses continue to show strength.
Assemble Your A-Team of M&A Advisors
If a business owner is considering a sale of their business, it is important to assemble a team of experts to assess and advise them. The team should be highly skilled and experienced in the field of executing transactions and handling situations that are identical to your situation should you decide to sell your business. The ‘must haves’ in your circle would be an M&A advisor (an investment banker or business broker), an attorney who specializes in M&A transactions, and a wealth advisor who can take feedback from the M&A advisor regarding estimated outcomes to measure if those outcomes are suitable for sustaining an owner’s lifestyle after the sale event. There are numerous other advisors who can add to a great M&A execution team, but getting one or more of these must-have advisors in your corner can aid in helping you assemble the remaining pieces you need to make life at least a little easier.
Keith Carlson is a Shareholder and Managing Director of M&A Advisory Services at VonLehman CPA & Advisory Firm. Learn more about Keith at vlcpa.com.
