Prior to making the switch back to investment banking and being an M&A advisor (helping people sell their businesses or acquire others), I was on the opposite side of the table making direct investments in lower-middle-market businesses. I reviewed hundreds of opportunities per annum, and on behalf of our limited partners, our firm would selectively choose 10 or so investments to pursue in any given year. The deals we closed as a firm will always be engrained in my memory. However, some of the most memorable opportunities I ever reviewed during that time were investments that we (as a firm) didn’t close. The reason some of those investments still stand out is that we were witnessing the byproduct of poor transaction timing by business owners. Much the way retailers rely on location, location, location (and their ecommerce platform!), sell-side transactions are extremely reliant on timing, timing, timing.
Timing a sale right is complex.
Most business owners I encounter are highly intelligent business men and women who have become successful by blending intelligence with a healthy dose of following their gut or making decisions based on emotion. Unfortunately, when someone is contemplating a sale of his or her most prized asset, following your gut or making a decision based on emotion can turn out to be a disaster.
Take, for example, the business owner I encountered in 2007. His business was being valued by the marketplace via a limited auction process at approximately $25 million. This amount of money was a transformative amount of wealth for the owner of the business and his family. The owner, like many, had built the business by reinvesting much of his excess profits back into the business via new and more qualified people, intellectual property, and other fixed assets. The first-generation business owner had invested nearly 30 years of blood, sweat, and tears into the business, and it seemed his time had finally come to reap the rewards of his hard work and his family’s endless personal sacrifices.
During the standard sell-side due diligence process with this business (which is intense), several findings emerged that began to diminish the company’s agreed-upon value with the buyer. The findings weren’t anything out of the norm for sell-side transactions within the lower-middle market, but the byproduct of those findings (e.g., a reduced purchase price offer) came as a huge surprise to the business owner. Moreover, in his world, when a deal was struck, you didn’t backtrack and renegotiate. Needless to say, he was perplexed and offended. The owner eventually decided to indefinitely postpone the selling process in hopes of the potential buyer conceding and just paying the original agreed-upon value. That never happened, and the business was never sold. Fast forward a year later to late 2008 and the beginning of 2009, and the Great Recession was taking a drastic toll on the entire country—both consumers and businesses. The same business that had once been generating approximately $4 million of EBITDA/operating profit was now generating approximately $2 million. What made matters worse was that the business owner had become ill and was unable to work as hard as he had in prior years to build the business. In addition to the reduced earnings, there was also a compulsion to sell (poor health). By the beginning of 2009, that same business that was once valued at approximately $25 million was now being sold for $9 million dollars. What a difference a year and a half makes, but a great example of bad timing and missing a good opportunity.
The moral of some stories, much like the business owner I encountered in 2007, is that holding out for the last dollar or being prideful in a game of chicken with a potential buyer isn’t always the best plan. Neither is dreaming up an unrealistic valuation for your business when the current market valuation is far more than you and your family would ever need to live a life free of monetary worries. As a sage mentor used to always say, “a bird in the hand is worth two in the bush”—this concept directly applies to timing your M&A deal.
A number of factors impact “the right time.”
Good advisors with considerable experience can draw upon a number of examples to help steer you in the right direction. Point being, numerous factors are out of your control as a business owner, such as credit markets, economic conditions, industry condition, business condition, and off-balance-sheet risk.
Right now, the timing of the market is ideal for many. We are in the late stages of an economic expansion, credit markets are frothy and open for business, buyers are hungry and flush with cash, and most industries are benefiting from strong margins. If you are even remotely contemplating a sale over the next 1–3 years, timing might be great. As I always tell business owners that I meet with – a million in profit today isn’t worth what a million of profit will be from a year from now (better or worse) and that is usually out of your control; don’t let the timing window close on you!