Timing Is Everything: the Risks of Waiting to Sell Your Business
By Trip Holmes
I’ve been working in middle market mergers and acquisitions for 35 years, and you can bet that if we haven’t seen everything at Sabre Capital in that time, we’ve sure seen a lot! And that includes watching as market cycles and the factors that influence them ebb and flow year after year.
In the world of finance and investment, it’s hard to “time” the market in areas where there are lots of wild variables that affect investors on a day-to-day basis. It’s hard to time investments in stocks and bonds, for example, and it’s even harder to time commodities, the staples and natural resources that drive global and national economies.
While all markets move, the volatility of daily markets doesn’t mean you can’t properly time investments or divestments in markets that tend to exhibit trend changes in terms of months and years. At Sabre Capital, we specialize in strategic planning for middle market, privately-held companies.
There are a couple of major influencers, outside of the normal, day-to-day market fundamentals, of market timing investments in middle-market companies. I’ve long been a fan of watching and defining historic market cycles in a variety of areas, but pricing and selling middle-market firms has perhaps the highest degree of predictability with this method. A colleague of mine in the M&A industry, Rob Slee, has put together a compelling model that shows how middle market transactions have followed a distinct pattern each of the last few decades, dating back to the 1980s.
According to Slee, every 10-year cycle sees a three-year buyer’s market with depressed prices, followed by five years of a bullish seller’s market with increasing prices, and finally a two-year period of pricing uncertainty. As you follow his model, the last year of the seller’s market is slated to be 2018. Even if he’s off by a year this time around, that leaves about 18 months for optimal selling of your middle-market business.
Here’s another prime influencer for most transactions in the middle market: interest rate risk. Very few buyouts in the middle involve all-cash offers. Much of the time, buyers are procuring companies, their assets, and real estate holdings using one or more loans backed by the Small Business Administration or other types of commercial bank financing. All of these loans feature interest rates that move with the Federal Reserve’s adjustment of the interest for the banks’ funding source, known as the Fed Funds Rate.
Just last week, the Federal Open Market Committee approved another quarter-point hike for the benchmark rate, the seventh increase since December 2015. There is expressed concern among members of the community that our economy might veer into an unsafe space, overheating from factors like low unemployment, recent tax reform, and increased investments. If the economy continues to trend in its current direction, you could expect to see multiple interest rate hikes, perhaps as many as four to six, in the next 18 months. Another series of hikes that mirrors the late 2015 to mid-2017 increases could effectively price many buyers out of your market.
In my mind, taken with the context of Slee’s model, we are approaching uncertainty from a middle market perspective with regard to 2019 pricing and ability to transition businesses to new owners, the uncertainty and misgivings about an overheating economy from the Fed should form a cautionary tale for many would-be sellers.
If you’re at or near the age you’ve had in mind for retirement, and you’ve been delaying the inevitable exit from your company, I’d encourage you to at least start actively planning for the sale of your business, tuning up the applicable areas to optimize your price and value to your potential suitors, much as you would fix up your home to sell. This means shoring up the books, performing your own due diligence that mirrors what buyers will do, so that you can clean up any lingering operational issues or matters of external pressure, such as litigation.
Most of all, the current market situation, defined as nearing the end of a seller’s market and exposure to interest rate risk, dictates that you think long and hard about your succession plan and perhaps speeding up the preparation of those who will take the reins from you at the time of your exit.
It’s time to get off the fence. M&A professionals like me will need to do business next year and the year after, but as with those who retain my services, I think it’s my duty to inform you that if you think you’re ready or almost ready to sell, let’s start the conversation and get some of the critical actions of selling a business moving forward. Contact me at Sabre Capital today, and get the peace of mind from knowing that you’re putting yourself in the best position to optimize your retirement.