Mergers & Acquisitions

Considering a Sale in the Current Market? Practical Guidance for Private Middle-Market Business Owners

By Robert Goldsmith, Founder and President of Northern Edge Advisors

After the past 18 months of exceptionally strong market conditions, private business owners are wondering: Is now still the right time to sell my company? Many are asking my firm this question in the face of myriad external factors that may adversely affect their completing a successful transaction: inflation, supply chain disruptions, geopolitical instability and mounting fears of a recession, to list a few.

The difficulty in answering this “now or later” question relates to the particular uncertainty we have at present in predicting future market conditions. Specifically, will there be a recession, and if so, for how long? How will tightening credit markets and a bear equity market impact buyer interest in acquiring private companies and the valuation of companies that are sold? 

While there is a lot to be concerned about, the M&A market has not shut down. Strategic buyers continue to use M&A as an important strategy to augment internal growth, and private equity is still chugging along with its piles of committed capital. While the M&A market may be down from its recent peaks, the volume of activity remains at historically high levels. 

There isn’t one surefire approach to determining whether to pursue a sale now, and in the context of the current dynamic landscape, our experience is that the right decision is best determined by the individual circumstances and objectives of a private business and its owner and not by dwelling on the fact that the market peak may be in the past.

Waiting to sell may be the sensible path. Business owners who believe their companies can withstand a recession or are hopeful about the timing of a return to stronger capital markets may come to this conclusion. Similarly, an owner with a desire to manage their company for a longer time frame or one who is not concerned about competition or capital investments may reasonably decide to hold off as well.

Many other private business owners, however, have a different assessment of the risk / reward trade-off in delaying a sale and prefer to approach the market now. For this group, recognizing the defining elements of today’s M&A market and preparing accordingly is key, and a few key points of advice are worth mentioning.

The inevitable recession question

Up until just recently, the most important question on the mind of a buyer was: How did the business perform during the pandemic? Today, every investment committee evaluating an acquisition will want to know how the business will perform in a recession. Much hinges on this, so prepare your answer in advance.

One way is to describe how much of your cost structure is variable versus fixed (less fixed obviously suggests better resilience). For example, a primarily commission-based compensation structure for your sales force is a plus.

Another approach is to highlight how your business performed in the last recession with quantitative support around the rebound in revenue and margins.

Or perhaps your business serves a particular customer segment that you believe will be less affected by inflation. Consider metrics that support this assertion.

Also, you can demonstrate your historical disciplined approach to making investments in your plant and equipment to provide comfort that no material capital expenditures will be required in the near term to support the business.

Invest in your financial reporting

Buyers and their representatives are not going to ask tough questions about your ability to withstand a recession in the initial meeting and then move on to other topics. This will be the focus for the many weeks and months of due diligence, and frequent and timely financial reports proving out the health of the business will be mandatory. Buyers will want to understand the pace of the business by reviewing orders, bookings, sales pipeline conversion, and more in real time, and you will be well-served to have the systems in place to readily produce the required reports.

Adapt the story

The current M&A market is open, but buyers are more discerning. In contrast to the recent exceptionally strong M&A market where buyers operated in part out of fear of missing out on the good times, buyers today are more focused on acquiring companies to satisfy a specific need. In this regard, it is essential that an owner understand why a buyer is interested. It may be that a buyer is missing a critical product or service offering to round out their business. Or they may have a need for an exceptional management team. Or they may be focused on acquiring a set of client relationships or expanding into a particular geography. So, ask questions of potential buyers early in the process to determine what to highlight and what to de-emphasize. And be aware that what may be interesting to one buyer may be a fatal flaw to another.

Again, in considering a sale, don’t focus on what once was. All that matters now is for options to be evaluated dispassionately based on the current market, your business, and your personal priorities. By preparing diligently, a sale now can be a significantly positive and rewarding event. 

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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