Recently I attended a presentation about stock market cycles and their relevance to selling (or buying) a business. The presenter made the case that it is best for owners to sell when the public equity market is in a strong uptrend, making new highs etc. because that’s when buyers are in the market, multiples are likely to be higher, financing is accessible etc.
This is especially relevant currently, given that the US equity market is trading close to all-time highs, and interest rates although rising, remain well below historical norms.
We also know that after the mega financial crisis of 2008, when the US equity markets tumbled drastically, hardly any acquisitions were completed, multiples shrank substantially and credit became largely unavailable.
So, without a doubt there is value to considering the state of the financial markets in the “sell or not to sell” decision making process. However, the question is whether timing the market should drive the decision to sell the business?
We don’t think so. Rather, the key question is whether the timing is right from the perspective of the business. For example, if the market cycle indicator is flashing green but the business is flat to declining, the buoyancy of the market is unlikely to help. If the business can’t make a strong case for future growth in the hands of new owners, that also won’t help. Other considerations may include storm clouds on the horizon in the company’s markets which can deter buyers. Also, keep in mind that in good times, buyers may have more options available.
What should you as a potential seller consider before pulling the trigger? Most important issues are the current health and future growth prospects of the business. There are many other considerations such as the strategic attractiveness of the business to a potential buyer; quality of management; key operating, competitive and financial trends etc. There’s much more here than we can cover in one blog post. However, just to illustrate why business performance is the key let’s assume that a company can increase profits (EBITDA) by 30% in 2 years but the exit EBITDA multiple decreases by 10% over that same span (possibly because the market has come off its peak levels). In this simplified example the seller would still be ahead of the game by selling 2 years later, making significantly more by waiting.
Bottom line: Sure, all things being equal a seller should exit in an up trending or exuberant market, but as we point out above, selling a business is far different and much more complex than selling shares from your stock portfolio. Helica can help you think through the issues. Connect with us now for a free, no obligation consultation.
