For several years now, professionals in the financial markets have been advising their mid-size corporate clients that the time was right for selling their business. It’s a topic of conversation that proves interesting to many business owners who have decided to retire, enjoy more personal time, or simply move on to their next career challenge. Sale prices have been at all-time highs, private equity investors has been awash in capital, and expectations were such that the market could not continue to be as good. So, is it still a good time to sell a mid-size company, or have we missed the market?
The market for selling a company continues to be strong. Through 2018, looking at transactions less than $100 million, Pitchbook reports that 902 Lower Middle Market private equity transactions were completed with a total value of almost $26 billion, about on par with 2017. Through the first quarter of this year, 148 transactions were completed with a value of $3.5 billion. The message for sellers of mid-size companies is that the market is open, and transaction volume continues to be robust.
Further, there is plenty of capital available to buy good companies. In the private equity universe (including large and mid-size investors), a record level of capital is available to invest according to Pitchbook. Investors across the market tell us that they are motivated to make investments that adhere to their investment individual criteria.
What does all this mean for company valuation today? Measuring value is often accomplished by observing the ratio of value (sale price) to earnings before interest, taxes, depreciation, and amortization (“EBITDA”). According to GF Data research for 2018, and focusing on transactions with a value between $10 and $25 million, the ratio declined from 6.3 to 5.8 in 2017. This indicates that transactions in 2018 had lower value than last year.
This data presents a mixed message to a business owner. On one hand, the market is active and has capital to invest. Conversely, for small to mid-size transactions, investors are paying less than the companies sold last year.
Does the data imply that the seller-friendly market has turned, and it is time to act quickly to sell a business? Yes, but other dynamics should be considered as well.
The current economic environment affects all companies to some degree. If the effects of regional or national economics are positive, and the business owner has the desire and ability to wait, selling at a future date may be considered. However, if the future economics are negative or uncertain, they may lead an owner to conclude that the time is right for a sale.
Stating the obvious, a company is worth less than if its sales and profitability have remained stagnant or, worse, declined. Regardless of the owner’s economic view, the risk of negative future performance may be great enough to motivate a sale. Personal circumstances, including declining health or retirement, can further decrease an owners’ tolerance for this risk and increase the motivation to sell.
Clearly, timing the sale of a business involves weighing many competing factors. Personal circumstances present strong motivations in deciding whether to sell and are often difficult to quantify. The market statistics for buying and selling companies are more concrete. It is still a good time to sell, and with some urgency if recent downward market value trends continue.
Brooks Crankshaw is a Managing Director and Partner of The Chicago Corporation, an investment bank specializing in providing advisory services to company owners wishing to sell their businesses or raise debt and equity capital.