If you’re a small business owner it is essential that you understand how this pandemic, and the government’s actions to stop it, will impact your ability to sell your business.
The past few years have proven to be a strong market for sellers but, as these effects take place, the window of time to sell your business for top dollar may be closing.
Current Status of the M&A Market
One of the questions we are getting every day is: What are you seeing in the market? Are banks still lending? Are buyers still buying?
The short answer is yes, to both questions. But they are also being more selective about who they lend to, invest in or acquire.
Owners planning to sell in the near future need to:
1. Do a better job preparing your business prior to going to market.
There are number of areas that can drastically enhance the value of your business. Start with the easily implementable changes that can quickly increase the value to potential buyers.
A great way to accomplish this is by completing a professional valuation of your business. A thorough valuation can help owners identify the largest areas of value, and lack thereof, that buyers will notice. This information can then be used to create an action plan that addresses key areas and prioritizes them based on what will have the greatest impact.
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2. Do a better job of presenting your business to buyers, investors and lenders.
This is often accomplished in the marketing materials prepared by your M&A Advisor at the beginning of the sale process.
It includes effectively articulating the strengths of the business and explaining how those have, and will, lead to strong growth and improved margins. Sufficiently highlighting these areas will better help the buyer or lender understand and see all of the value in the business.
It also includes effectively presenting other key areas such as: potential growth opportunities the business is positioned to pursue, having strong middle management in place, ensuring the right people are in the right seats within all areas of the business, showing strong customer dynamics and maintaining strong relationships with suppliers. These attributes are particularly important during a volatile economy.
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Impact of Government Actions
Actions that the government is taking to support the economy will have a major impact on future valuations and your ability to sell.
What you need to know:
- The government recently announced a $2.2 Trillion aid package and there may be more to come.
- Adding that much money to the economy will cause sizeable inflation in the future.
- In order to combat massive inflation, the government will likely need to raise interest rates.
- Higher interest rates mean using debt as part of the transaction gets more expensive.
- As debt gets more expensive, buyers require a lower price for the same business in order to achieve the same returns.
- In addition, even with no debt, valuations will decrease as higher interest rates lead to higher discount rates when valuing a business. (Higher discount rates lead to lower valuations since you are dividing by a larger number).
- Lastly, we may see higher taxes in the future:
1. As the government attempts to address inflation, and
2. To address its growing national debt.
Higher taxes directly impacts the amount of proceeds from selling a business.
Good News from Buyers
While buyers are being more selective, many of them still NEED to put money to work acquiring businesses. This means that demand (buyers wanting to buy) is still strong… for now.
One large category of buyers is private equity. These firms have raised hundreds of millions of dollars from investors, and promised them a return on their money. In order to generate that return they need to invest that money (via acquiring businesses) instead of letting it sit in cash earning nothing.
Another large category of buyers is other large businesses. While some of these have seen this pandemic negatively impact cash flow, many of them will be looking for opportunities via acquisition that can help them create synergies, achieve scale and generate the needed return on capital.
We’ve been experiencing high valuations for a while now due to a strong economy and low interest rates. But the window of time to sell your business for maximum value may be closing in the near future.
We are already starting to see a spike in inquiries from owners who want to get a jump on selling their business this seller’s market changes.
If you are considering selling your business in the next few years, it’s best to start that process now so you can go to market before a number of these factors start taking effect.
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About Your Legacy Partners
Your Legacy Partners is a boutique advisory firm specializing in Valuations, Consulting, Transaction Support and M&A Advisory services for small businesses.
We combine two decades of advising small business owners with years of experience as a buyer and investor to bring our clients a unique perspective that helps enhance value, present a number of qualified buyers and maximize proceeds.
Our “Sell Smarter” process starts with an in-depth business valuation, followed by a detailed pre-sale consulting process that helps prepare the business and the seller. From there we create professional marketing materials, facilitate the entire sale process and help with deal structuring and negotiations.