Selling Companies - Decision Timing Timing of your sale will significantly impact value. It can also affect the speed and certainty of the process. Three timing factors, relatively independent of each other, will normally influence your decision:
Rarely, if ever, will the optimal points in all three cycles coincide. In any event only hindsight will tell us the optimal point in the market cycle. The timing decision requires a combination of good judgement and good fortune, but the benefits of good timing easily justify both a very diligent analysis of the best timing and, when the timing does not appear right, a bit of patience. Market Cycle M&A markets are highly cyclical. A buoyant economic outlook, coupled as it often is with relatively easy credit markets and high valuations in publicly-traded securities, drives most progressive companies to pursue ambitious growth targets, often largely through acquisitions. The same conditions fuel competitive bidding by private equity funds. This produces active auctions among strategic and financial buyers, higher valuation multiples, preemptive bids, tighter due diligence timetables, less demanding vendor representations, faster closing, and less post-closing risk for sellers. Generally the positive portion of the M&A market cycle builds gradually over a lengthy period but drops more suddenly, leaving us with declining business confidence, less debt financing available and a general decline in the corporate appetite for acquisitions. From a seller’s perspective, the key to value maximization is to bring the company to market during a rising phase of the overall M&A market cycle, recognizing that the sale process normally takes six months. It is important to close the sale, not just start the process, during the positive phase of the cycle. Company Readiness for Sale Strategic acquisitions, traditionally the primary source of buyer interest, are largely aimed at accelerating growth, e.g. through greater scale, product or market extension, filling technology gaps, etc. Valuations are higher at a stage where the company has achieved strong revenue and earnings growth in the past couple of years and can demonstrate that it is still on a positive growth track. These growth conditions incent bidders to bid to win, not only to be the acquirer, but also to prevent competitors from acquiring. Don’t exhaust all the growth potential before selling the company. When an industry is consolidating, it can be costly and risky to wait too late in the consolidation cycle. The largest synergistic improvements from consolidation, especially on the cost side, are often achieved during the first half to two-thirds of the eventual consolidation. Later stages in the consolidation process are less compelling to the buyers and this is reflected in valuations. For some companies, there is one single potential buyer ideally positioned to gain by acquisition. In these cases it is important to maintain good intelligence on the potential buyer’s growth strategy and its financial capacity to make the acquisition. The optimal timing should be opportune for the ideal buyer and also suitable for a robust auction to push the ideal buyer’s pricing up in a very carefully managed sale process. Shareholder Factors Parent companies, and families or individuals controlling private companies have factors external to the business that may influence sale timing. Shifting corporate strategic focus may dictate selling non-core businesses in order to focus capital and management on accelerated growth in the core business. Founders and other controlling shareholders active in management eventually seek liquidity and a change in their personal lives that requires sale, or may prefer to sell rather than lead the business into its next major growth stage, especially if that stage requires a commensurate increase in risk capital. Whether the selling shareholder is a major corporation or a family or individual controlling shareholder, the shareholder’s desire for liquidity and its reinvestment plans will frequently be a driving force in timing. Where the controlling shareholder intends to withdraw from active involvement in management, the optimal sale timing should allow for at least a year of post-closing transitional involvement, to ensure that the sale process appeals to a full range of strategic and financial buyers. When Timing is Terrible If the shareholder wants to sell but either the M&A market is poor (as it is now in early 2009) or the company needs another year to demonstrate its performance and potential performance, patience is usually the answer. In the meantime, groom the business for sale by identifying and diligently executing on key areas for value improvement. In addition, partial liquidity can often be achieved at this stage, without unduly hindering later sale. We can assist you at this stage in getting the company ready for later sale at higher values, and in recapitalizing the company now to provide partial shareholder liquidity. |
