Small business owners often struggle with the question: when is the right time to sell my business? While there’s no “one size fits all” answer and there may be a myriad of reasons to stick with a business and reinvest over the longer term (based on the owner’s age, risk profile, the maturity of the business, growth prospects, and other factors), there are also many favorable dynamics at work in the overall market today which make it a good time to be a seller.
1. Private equity has record levels of “dry powder” available for investment. According to Bloomberg, private equity firms are starting off 2020 with nearly $1.5 trillion in uninvested capital, up from around $1.0 trillion a couple of years ago, with fundraising activity exceeding the rate at which private equity firms have been able to deploy capital.
2. Many corporations must consider strategic acquisitions in order to meet their growth targets and to keep up with rapidly evolving markets, technologies and consumer preferences. The EY Global Capital Confidence Barometer found that 52% of respondents are planning to actively pursue M&A over the next twelve months, and Steve Krouskos from EY stated that “the speed with which companies need to transform their portfolios cannot, in many cases, be done without M&A.”
3. Based on #1 and #2 above, there is a large pool of potential buyers looking to put capital to work. This level of demand has driven up valuations to a remarkably high level. In its Q3 2019 US PE Middle Market Report, Pitchbook reported that median buyout multiples exceeded 12x EBITDA in 2019, compared to 7x a decade ago in 2009.
4. Beyond the valuation implications, the sellers’ market environment has also in many cases given sellers greater leverage in negotiating other key transaction terms such as transaction structure and indemnification provisions.
5. The current economic cycle is likely nearing its end. After more than a decade of upward momentum, most agree that a downturn is inevitable within the next few years. It’s still possible to sell a business during a downturn, but there may be a more limited buyer pool (as some groups may be experiencing their own financial challenges or may be more conservative about investment decisions) and valuations will likely be lower. Also consider that your business’ revenue and EBITDA may decline in a recession, so a buyer may be applying a lower multiple to lower EBITDA.
If selling is something that you’ve thought about, it’s probably worth further discussion sooner rather than later. At Mirus we are always happy to have a conversation and talk through the factors specific to your business and your objectives.
Kate Soto is a partner with Mirus Capital Advisors. She works with owners of middle market businesses and can be reached at email@example.com.