It is not uncommon for business owners to wonder: when is the right time to sell my business? There are many factors that play into the change from a question of “when” to a determination that “now” is the right time to sell a business. These include the company’s financial condition and performance, ownership’s personal financial situation, age of owners, succession goals and business climate.
According to GF Data®, which provides data on private equity-sponsored M&A transactions with enterprise values of $10 – $250 million, the transaction environment has stagnated in 2013 after a very active fourth quarter 2012. Tax-driven transaction activity in 2012 led to the widespread sales of businesses. However, many of the companies that did not close deals prior to the end of the year were taken off the market once the perceived tax benefit was lost. GF Data reported 130 completed transactions in the second half of 2012 compared to only 33 in the first half of 2013.
What does this mean for business owners?
It signals that the transaction environment may now be prime for selling. Here’s why:
- Investors are looking for quality investment opportunities. In 2013, investors have struggled to identify quality investment opportunities resulting in a build-up of cash, particularly with private equity groups. Private equity groups have more money sitting on the sidelines than ever, with funds having raised significant amounts of capital that hasn’t been fully deployed. Businesses, particularly those with $1 million or more of EBITDA (earnings before interest, taxes, depreciation, and amortization), are experiencing more traction from buyers today than they have in the past decade. Big firms have come downstream and are making serious offers for smaller companies.
- The transaction multiples are likely in your favor. The supply and demand mismatch for good deals is also being reflected in an increase in recent transaction multiples, a common basis for purchase price. While transaction multiples tend to vary by industry, GF Data reported an average purchase price of 6.1 times adjusted EBITDA in the fourth quarter of 2012. The average multiple increased to 6.4 times in the second quarter of 2013. To illustrate the impact, this would result in an increase in value of $300,000 for a company with EBITDA of $1 million, or almost 5%. It should be noted that due to lower deal counts the transaction multiples may be reflective of outliers.
- Low interest rates mean more potential buyers. Interest rates are also a factor in the current transaction environment. As the United States continues to experience the lowest interest rates in decades, buyers are able to finance the purchase of a business very inexpensively. This has a compounding effect on the demand for quality companies.
So is now the right time to sell? Although there is no definitive answer, many signs point to “yes.” If your goals include the ultimate sale of your business, now may be the right time to explore the possibilities.
(Information in this blog post from RKL and GF Data may not be use without permission of RKL and GF Data.)
RKL’s Business Services Consulting Group is comprised of professionals with extensive experience helping business owners successfully navigate acquisitions. To learn more, contact Paula K. Barrett, CPA/ABV, CVA, partner and functional leader of RKL’s Business Consulting Services Group at firstname.lastname@example.org.
Contributed by James M. Spencer, CPA, MBA, CVA, a manager in RKL’s Business Consulting Services Group. He provides business valuation, financial modeling and analysis including projections and forecasts, project feasibility analysis and assistance with acquisition and sales of closely-held businesses.