Over the course of this past year, we in the middle market heard a near-constant refrain: this is the year to sell. And for many people, that was true. At a macro level, the economic outlook was positive, unemployment figures finally appeared to be cheerier, and interest rates were low. Things looked particularly bright for small- to mid-sized businesses: they were performing well, growing at a faster rate than the annual GDP, and increasingly gaining the attention of investors.
What’s changed in a year? Not much. Which is exactly why 2015 could be an even better time to sell. Key indicators like low interest rates, growing numbers of strategic buyers and increased buyer power point to continued economic health. And now, there’s an added bonus for owners thinking about going to market: they have sustained evidence of a robust and growing economy.
Compared to this time in 2014, we’ve put another year between ourselves and the stress of the recession. It’s another year of solid earnings on the books, signaling a larger universe of buyers, more room to negotiate terms, and greater odds of closing a deal. The years 2013 and 2014 are proof of this, seeing a 55 percent growth in transaction amounts. What’s more, businesses sold for higher median revenues, rising by three percent in 2014. Strong financial performance means sellers can secure more money on a sale, and with the economy primed for even further improvement, median sale prices should continue to rise in 2015.
Of course, this argument prompts the question: if 2015 is better than 2014, why not wait until 2016, or 2017, or 2018? Because the passing of time is a double-edged sword. Yes, it’s certainly a seller’s market – for now. But just as we’re another year out from the recession, we’re also another year closer to taxes increasing, interest rates rising, and a market saturated with baby boomers selling their companies and driving down value. While the timing is unpredictable, these shifts are inevitable.
Let’s take a closer look.
Right now, the environment is becoming more receptive to tax increases. For example, there are current proposals that would raise the top rate on capital gains from 23.8 percent to 28 percent and subject more varieties of capital gains to taxes. With the potential for change in the future, it’s not a bad idea to consider the after-tax value of a business in current and higher tax scenarios.
Interest rates could also increase, particularly as the economy continues to strengthen. Although private companies are valued on enterprise value – before interest rates – they’re still impacted by interest rate fluctuations. Simply put, increased rates increase the cost of doing business. As debt becomes more expensive, debt providers will take a bigger bite out of a company’s EBITDA, which inevitably will affect the M&A market.
Demographics play a role here, too, as our country is approaching a mass exodus of baby boomers into retirement. This group, born between 1946 and 1964, founded more businesses than any other generation. So as a generation made up largely of entrepreneurs and small business owners, there will soon be plenty of new folks entering the market.
To put this into perspective, close to 4 million companies around the country are owned by baby boomers. That comes out to about 66 percent of all companies in the United States with employees. It’s estimated that 65 to 75 percent of small companies in the United States will be put up for sale in the next five to ten years – due to the high number of baby boomers exiting the market. It’s simple economics to deduce that with more supply entering the market, value will decrease from an influx of buyer opportunity. Again, the savvy business owner will get ahead of this curve and proactively plan to sell before the market becomes saturated.
As a business owner, the decision to sell is not always black and white: it’s important to weigh the costs and benefits of selling or holding a business while factoring in multiple considerations, some of which have little to do with current conditions. But there’s no question that the market is ripe for transactions in 2015 – and time tends to be the number one killer of deals. If an opportunity has presented itself or you feel the timing is right, don’t wait. Carpe diem, or – for something a bit more timely – when you’re on the one-yard line, don’t throw a pass.
Posted on February 16, 2015
by Oaklyn Consulting