Business owners who are contemplating a sale of their business often find it difficult to decide on the best time to sell. A number of external market factors contribute to a positive sales environment. Many industry experts predict that now is the time for middle-market (companies with revenues between $10 and $250 million) business owners to sell their business at maximum values.
THE BEST TIME TO SELL YOUR COMPANY IS NOW!
The following market factors contribute to a favorable seller’s market in 2018.
- Strong Economy: The U.S. economic outlook for 2018 is healthy, as measured by key economic indicators including gross domestic product (“GDP”), inflation, and unemployment rates. According to the most recent forecast released at the Federal Open Market Committee (“Fed”) meeting on March 20, 2018, GDP is projected to increase 2.7 percent in 2018. The unemployment rate will drop to 3.8 percent in 2018, significantly lower than the Fed's original 6.7 percent target. Inflation will be 1.9 percent in 2018, excluding the effects on gas and food prices, which are more volatile.
- Buyer Optimism: Growth through acquisition continues to be an important strategy for many companies, as buyers are planning to be more active in 2018. According to the seventh annual Citizens Commercial Banking’s Middle Market M&A Outlook, about three-quarters of buyers reported being currently involved in or open to an acquisition. Buyer confidence is also significantly stronger, heading into 2018 with nearly half of buyers (47 percent) confident that growth through outside investment is an appropriate strategy, versus 30 percent in 2017. Forty percent of buyers are extremely confident that an acquisition will be completed in 2018, compared with just 23 percent in 2017. Generally buyers are looking for well-run businesses to invest in and make a good profit.
- Available Private Equity (“PE”) Capital: According to Bloomberg Businessweek, PE firms are “sitting on a record $963.3 billion of dry powder,” committed capital that they’ve raised, but have yet to invest. PE investors failed to deploy large amounts of capital in 2017, despite raising larger funds, due to a high-priced environment and stiff competition. The large accumulation of PE cash with more competition has the potential to drive up price tags for investment targets and could lead to an expansion of exit activity in 2018. PE funds typically have a limited time frame for investing, leading M&A industry experts to anticipate an increase in acquisition activity from these groups.
- Low Interest Rates: Lower rates make it easier to obtain deal financing for buyers without access to PE funds. Despite the fact that the Fed increased the current fed funds rate to 1.5 percent in December 2017, interest rates remain relatively low. Although the new Fed Chairman, Jerome Powell, indicated that he will continue to slowly raise rates (2.1 percent in 2018), interest rates will still remain at historic lows.
- High Deal Multiples: Deal multiples vary greatly depending on the size of the business, industry conditions, and political factors (i.e., tax and healthcare reform). Companies in the middle market tend to transact for larger multiples as these entities are expected to experience higher growth and cash flow, and are typically targeted by larger buyers (i.e., public companies) or private equity groups that will pay premiums for synergies. According to GF Data, the range for market value of invested capital (“MVIC”) divided by earnings before interest, taxes, depreciation, and amortization (“EBITDA”) multiples was 6.6x to 9.0x for middle market companies in 2017.
- Tax Reform: President Donald Trump signed into law the Tax Cuts and Jobs Act (“TCJA”) on December 22, 2017, which includes numerous changes that will significantly impact mergers and acquisitions (“M&A”). One of the most important changes, a reduction in the corporate tax rate to 21 percent, will make the United States a more attractive jurisdiction for inbound M&A activity and may increase the value of U.S. businesses. Other tax law changes could result in lower taxes on deals for sellers.
DON’T WAIT TOO LATE!
Some business owners make the mistake of waiting too long to sell. Sudden illness, burnout, death of major shareholders, changes in the market, and other negative circumstances could force a sale of a business at a substantial discount. The best time to sell a business at the high end of its valuation is when the company is doing well and major market factors are positive. It takes an average of 6 to 12 months to complete a sale of a business. Sellers who start now will be able to reap the benefits of the current favorable market.
With assistance from a group of key advisors including CPAs, investment bankers, and attorneys, a business owner can plan a successful exit. Citrin Cooperman provides buy-side and sell-side services to business owners and their companies. With a special focus on middle-market transactions, our integrated team of transaction, valuation, and tax specialists can provide guidance to sellers throughout the M&A transaction process.
UPCOMING EXIT PLANNING SEMINAR
Citrin Cooperman, along with the XPX Exit Planning Exchange, are proud to present, “Guide to Building Your Successful Exit Plan,” on Thursday, May 24, 2018, at the Fairview Country Club. This seminar will give you an exclusive opportunity to hear from business advisors on the importance of succession planning and provide insight on creating a successful and effective strategic plan for your business. For additional details or to register for this complimentary seminar, please contact Laura Di Diego at firstname.lastname@example.org.
ABOUT THE AUTHOR
LaQuita Jewett is a director in Citrin Cooperman’s Transaction Advisory Services Practice in the New York City office and can be reached at 646.695.7834 or at email@example.com. Citrin Cooperman is a full-service accounting and consulting firm with 10 locations on the East Coast.