The Convergence of Market Forces
Call it the perfect storm. Baby Boomers have reached retirement age. They’re making the largest generational wealth transfer in history. International investors hunger for American businesses. They consider these investments the best in the world. Finally, COVID-19 created an unexpected consequence. The pandemic upended global supply chains and sparked a dramatic surge in M&A activity.
What does all this mean?
You may receive a phone call from a buyer. They might offer you an eye-popping price for your business. This could happen even if you never intended to sell.
Prepare Before the Phone Rings
Consider your options now, before that call comes. Unsolicited offers proliferate today. The pandemic disrupted global supply chains. Manufacturers and distributors attract companies seeking guaranteed supplies of raw materials and components. These companies couldn’t get goods during the pandemic. Now they’re shifting to vertical integration. They acquire manufacturers and distributors to help them weather the next crisis.
However, the surge in offers and prices extends beyond manufacturing and distribution. An Ohio fast food chain recently received an offer at 18 times earnings. The industry typically sees multiples of eight to ten. Other industries experiencing strong offers include trucking, medical innovation, and professional services.
Why Buyers Pay Premium Prices
Buyers willingly pay more for acquisitions right now. They’re paying premiums of 15 to 18 percent because they seek synergies. Competitors increasingly buy each other. Companies buy their suppliers. This trend drives market activity.
The 10-Year Question
Current momentum reflects a key reality. Prices may not reach these heights again until the next business cycle peaks. That could take 10 or more years.
Business owners considering an exit within that timeframe should seriously evaluate any offer they receive. We expect today’s strong prices to continue into 2022 and 2023. Don’t wait for the phone to ring. Become educated about deal-making stages. Talk to your business partners or family members if you own a family business. Consider your personal goals. Most importantly, consult your trusted advisors.
Evaluating Unsolicited Offers
When you receive an unsolicited offer, determine if it’s competitive in today’s environment. The suddenness may catch you off guard. Don’t let that discourage you from considering it. Conversely, don’t accept without proper due diligence.
Your business value depends on the beholder’s perspective. A competitor has different motivations than a private equity buyer or an ESOP. Valuation represents a range. Sales price becomes a negotiated amount. If you decide to proceed, consider several variables to determine fair pricing.
Making Fact-Based Decisions
Quick answers don’t exist here. “It depends” never provides the right answer. When clients bring us offers on their businesses, we examine all options and trade-offs. This helps them make fact-based decisions, not emotional ones.
Family Business Considerations
Personal considerations matter significantly, particularly with family-owned businesses. The family business likely dominates holiday dinner conversations. Each family member holds a stake in the business. Emotions run high. Make family discussions as analytical as the financial due diligence of an offer.
How will younger family members who expected to own the business plan their futures? Do they want to remain as employees? Could sale proceeds fund new businesses better suited to their talents and interests?
Planning Your Liquidity Event
This represents your lifetime’s liquidity event. Once you sell your largest asset, what comes next? Now is the time for comprehensive planning. Focus on tax planning, wealth management, and estate planning. These steps help preserve wealth and minimize income taxes. Consider setting up trusts and exploring options for your new wealth.
Do you want to start another business? Will you invest in real estate or securities? How do you want to transfer wealth to your family’s next generation?
The Time Investment Required
People underestimate the thinking time a business transfer requires. This becomes the largest move of your life. It demands time and energy. It should result in your best decision ever.
Take Action Now
Contact your Rea advisor to start a discussion about your exit readiness. You never know who will be on the line the next time the phone rings. We will help you sort through the myriad of issues and be prepared to make the best decisions possible for your unique situation.
By Paul Weisinger, CPA/ABV, CVA, CEPA (Cleveland Office)
