The year 2018 is shaping up to be economically strong. If you are a business owner, with a company having revenue greater than $15 million, and you’re thinking about moving on to the next phase of your life, then consider these three reasons why 2018 might be “the year” for you to sell your company.
- The Economy
- Available Capital
- Sale Multiples.
Let’s take a closer look at all three reasons, so you can determine if 2018 is “the year” to sell your company.
Many business owners were ready to sell their businesses just before The Great Recession. Then the economy tanked, company valuations dropped accordingly, and transactions were not completed. We can see this trend playout when reviewing the number of M&A deals on record for that time. According to the Financial Times, an unprecedented number of M&A deals were cancelled in 2008 with a drop in total volume of 29% versus the previous year.
The economy today appears to be growing more quickly than in the past, and that’s great news. Unfortunately, another recession could be in our future. While economic cycles are tough to predict ITR Economics, and their forecast model, accurate nearly 95% of the time, predict a moderate recession in 2019.
In addition, KKR recently released their economic forecast which points to a near certain recession at some point in 2020. Per KKR their “base case for some time has been that a modest economic slowdown will occur in 2019”. KKR also states “With tax cuts taking effect in 2018, the chance of a near-term recession appears quite remote” and “consistent with this viewpoint, our proprietary recession model, suggests a limited chance of recession during the next 12 months”. According to their model, high interest coverage, tight High Yield spreads, low delinquencies, and a modest consumer obligations ration, should all create favorable tailwinds that sustain economic growth through 2018.
KKR’s chart below tracks historical economic activity which may give us some insights into the next few years.
It’s important to learn from the past and take advantage of the economic climate when the going is good. You don’t want to be caught out trying to sell your business in a down economy, especially when you’re thinking of spending your time differently in the future.
If you don’t act when the market is in your favor, then you will have to hold out for the next upward economic cycle, or you can go through with the sale, but likely accept a lower valuation.
As of today, there is a lot of available capital…almost a trillion dollars worth! Capital that is available through both Private Equity Groups (PEGs) and Corporations.
Consider another chart (below), from PitchBook, a company that provides data, research and technology for private capital markets. Private equity capital, including money raised from prior years still waiting to be invested, has grown 140% from 2006 to 2017. PitchBook estimates that Private Equity Groups have around $962 billion ready to be deployed and invested. This capital, waiting for investment is often called “dry powder”, which is un-deployed capital “waiting” at asset management firms for deal commitments.
No matter if you call it capital or dry powder, either way, that’s a lot of cash for acquisitions.
Inside this huge pile of capital are sector specific institutional investors looking for targeted acquisitions. I like to call those investors “Smart Money”. “Smart Money” brings sector experience and success to a transaction and it creates additional value for the invested companies and investors.
Finding “Smart Money” is one of the secrets to a great sell-side transaction as it positions a company for future greatness. When we work with a client to sell their company we identify the “Smart Money” buyers in order to realize the highest valuation at the time of the sale and the best partner for longer-term success.
In addition to the above mentioned PEG available capital, Moody’s Investors Service, suggest US-based companies are sitting on $1.8 trillion in available cash, with $1.3 trillion sitting offshore ready to be repatriated to the USA for investment, or returned to shareholders as dividends or stock buybacks.
Either way, this cash will also find its way back into the markets looking for attractive equity or debt investments. And, depending on how Corporations manage their impact of the new Tax Act of 2017, they may have even more cash than originally planned.
The issue is not a shortage of money to acquire companies but a shortage of high quality companies to acquire. The good news here is that selling in today’s market is to your advantage.
Sale multiples are at historic highs. The improving economy and ample supply of capital have created an environment where transaction values have increased over the last 5 years. This of course describes the classic supply and demand scenario, where there is more money (the demand) chasing fewer quality deals (the supply), which as we know, drives up acquisition multiples. All of this is great news if you are thinking of selling your company today.
Have a look at the second chart below from PitchBook. We can see that sale multiples are strong and steady at nearly 11 times EBITDA. This is driven by a number of factors including low interest rates, ample available acquisition capital, and the competition to acquire high quality companies with real growth potential.
Is Your Company Ready for a Sale?
You’ve just read why 2018 is shaping up to be a good year to sell your company. A strong economy, ample supply of available capital, and historically high sales multiples are all important factors working together to provide an excellent environment for a sale.
The reality is that the best deals will get the most attention. As 2018 progresses, buyers will be looking to concentrate on deals that they can close in 2018.
If you think you are ready to sell your company, we can help you to determine a valuation range, identify your businesses strengths, as well as discuss near term opportunities for valuation improvement.
But before we start looking at how much your company might be worth in terms of a sale, it’s important to review ways in which you can make it even more valuable.
We’ve prepared a checklist entitled “10 Ways to Make Your Business More Valuable” and it’s available at no cost to you. Just visit our website to download your copy today.
So take a few minutes of time today to learn how you can make your business more valuable and then give us a call if you feel like it’s time to sell.
Don’t miss this opportunity to sell your business and capture your future!
About Illes Investment Banking
John Illes created Illes Investment Banking as an online presence to increase awareness of how investment bankers can effectively help middle market business owners sell their company.
John is Managing Director with Merit Harbor Capital, a leading boutique investment bank focused on middle market companies. John, and the team at Merit Harbor Capital, have owner/operator experience and have walked in your shoes. They understand your needs better than traditional investment bankers with only a financial background.
John can be reached via phone at 702-463-0332, or via e-mail at email@example.com
John Illes, CM&AA, MBA
Founder & President, Illes Investment Banking
Managing Director, Merit Harbor Capital
 Financial Times, Record Number of M&A Deals Cancelled in 2008, December 22, 2008. https://www.ft.com/content/d322de98-d056-11dd-ae00-000077b07658
 Seeking Alpha, ITR Economics: 2019 Recession, 2030 Depression, March 23, 2017. https://seekingalpha.com/article/4057365-itr-economics-2019-recession-2030-depression
 PitchBook, 1Q 2018 Private Market Playbook, https://reports.pitchbook.com/1q-2018-private-market-playbook/?utm_source=nl-na&utm_medium=playbook&utm_campaign=1Q-2018-private-market-playbook
 Moody’s Investors Service, Moody’s: US Corporate Cash Pile Grows to $1,84 Trillion, Led by Tech Sector, July 19, 2017, https://www.moodys.com/research/Moodys-US-corporate-cash-pile-grows-to-184-trillion-led–PR_369922
 Pitchbook, US PE Breakdown – 2017 Annual, January 15, 2018, https://pitchbook.com/news/reports/2017-annual-us-pe-breakdown
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This blog post does not constitute an offer to sell or a solicitation of an offer to buy any securities and may not be used or relied upon in connection with any offer or sale of securities. An offer or solicitation can be made only through the delivery of a final private placement offering memorandum and subscription agreement, and will be subject to the terms and conditions and risks delivered in such documents.