Perfect Storm?

Posted on January 21, 2014 · Posted in Blog

Perfect Storm Timing & Available Capital

Many external conditions impact the value and marketability of a business.  While business owners can’t control these conditions, they can control the timing of their exit.

Outside factors like interest rates, available capital, number of buyers, number of businesses on the market, industry and economic conditions all impact the value and ability to sell a business.

By selecting the most opportune time to exit, business owners can maximize value.   Today’s market conditions may be as close to a perfect storm as we have ever seen.

  • Interest rates remain historically low. When interest rates are low, buyers can finance acquisitions more inexpensively, which effectively increases the value of a business. As interest rates slowly rise, deals will become more expensive and those additional costs will lower the value of a business.
  • Available capital professional buyers have, like private equity firms, are at all time highs, surpassing levels once seen in 2008 before the market crash. Preqin Ltd. reports that there is 1.074 trillion dollars of “dry powder” for these firms to put to work.
  • Larger corporations are sitting on significant cash reserves, with the opportunity to finance deals using cheap debt. U.S. Business (non-financial) are sitting on more than 1.8 trillion dollars in liquid securities. Should they start putting that money to work, often times the fastest way to grow is via acquisitions.
  • The supply of businesses on the market will significantly increase as baby boomer business owners continue to hit retirement age.  According to Patrick Ungashick, president of White Horse Advisors, 9 million of America’s 15 million business owners were born in or before 1964, resulting in one business owner turning 65 every 57 seconds. This will result in a tsunami of businesses for sale and could significantly impact the ability to sell a business.
  • The supply of buyers from “younger” baby boomers who are old enough to have worked and saved for 25 years or more, but not ready to retire creates an ample supply of qualified buyers ready to pursue the American dream of owning a business.
  • The recovering economy continues to add a tailwind and confidence to potential business buyers.

Timing is crucial because ultimately business owners considering an exit may only have a small window (1-2 years) where interest rates are low, buyers can find financing, and the economy is doing well. When the stars align, business owners can hope to receive more favorable offers in terms of deal value, number of potential buyers and deal structure. If you are considering exiting your business, times may never be better and don’t count on it staying this way forever.