Are you waiting to sell you company for when the economy starts to weaken? That might be a bad idea. Here’s why.
First: Look how long a down cycle can last. The last one—admittedly a very bad recession—lasted at least four years, and longer by some other accounts. (Some people insist it’s still affecting deal values by suppressing them, because acquirers have never lost their jitters, fearful of a catastrophic drop in the market). If there is a downturn in 2019, and the dip lasts four years, we won’t return to a strong seller’s market until 2023 or 2024. That’s six years from now. Let’s say you’re 60 and resist selling now, as you try to milk the last good years out of this current up-cycle. You’d be 66 before a deal gets done. Given that it sometimes takes eight to 12 months to get a deal done, from initial offering to closing, maybe you’d be 67. Willing to wait that long? If not, it might be time to take your chips off the table while you still have a big pile today, knowing that you risk leaving money on the table by selling, maybe, just before the peak.
Second: Values change, sometimes dramatically, even at the whiff of a downturn. Let’s say you have a company that books $20 million in top-line revenue, with a 14% EBITDA margin. Your EBITDA is $2.8 million. Looking at the multiples of EBITDA being paid for companies in our sector today (around 5.5), it’s reasonable to assume that your company is worth $15.4 million. (5.5 X 2,800,000).
Let’s say that a bad economic report comes out. Acquirers are, after all, reading the same media reports that we read. (In fact, they are probably reading them even more closely than we are.) With some softening of the economic forecast, the acquirer may hedge his bets a bit by offering 5X instead of 5.5X. This is a referred to as a reduction of “half a turn.”
Not a big deal right? I mean, how much can that affect values? Actually, it’s rather dramatic. Let’s do the math.
A company that is booking $2.8 million in EBTIDA, when purchased at a 5X yields a total enterprise value (TEV) of $14 million, not $15.4 million. Yes, that one half a turn reduction drops the price of your company by $1.4 million. If that isn’t impressive, just imagine if the acquirer drops the multiple of value down one full turn, from 5.5X to 4.5X. In this case, the company that once was valued at $15.4 million is now valued at $12.6 million. Ouch. Do you still want to wait out the next recession? The “delta” there between 5.5X and 4.5X is $2.8 million. That, coincidentally, is the EBITDA for an entire year of operations of the company we are using here for an example.
Third: There is a middle path. If you are not sure that you want to sell right now, and want to play the role of the gambler to see how long your streak lasts, why not prepare your company for sale today, put the deal on the street, and see what kind of offers you get. You may not even be aware of it, but a competitor may be lying in wait, with a secret strategic plan in mind, just aching to buy your business. Yet they’ve been unwilling to indicate that interest to you. If you put your company up for sale, it may surface interest you weren’t aware of. If no offers came in, or if offers came in that were lower than you wanted, you could simply take the company off the market for when your performance is better, or the atmosphere changes.
Keep in mind that selling your business takes time. It takes at least two months, sometimes longer, to properly prepare a deal book, and another unpredictable period of time to find a buyer, and then another period of months (at least two, often more) to go through the due diligence and closing processes. Be sure to bake that into how and when you time the offering of your company for sale, whether you sell in today’s good market, or a future market we can’t predict.