John1 owned a successful business in Utah Valley. A buyer offered him $5.5 million to purchase his company. John turned this offer down because he wasn’t ready to sell the company just yet. When John was finally ready to sell, he could no longer find a buyer. Two years later his company declared bankruptcy. John had missed his opportunity to cash in.
We hear this story far too frequently. Business owners are often under the impression that selling tomorrow will be better than selling today. That is not always the case. The M&A market is cyclical in nature. It goes up and down just like the stock market. Sometimes it is a buyer’s market and sometimes it is a seller’s market. Had John planned for the eventual sale of his business with appropriate professionals that accounted for all of these considerations, the outcome may have been much happier.
The goal of this article is to help business owners better understand the M&A market—why it is wise to begin planning in advance for a future exit and to be flexible in considering when to sell.
The M&A Cycle
The M&A market is cyclical. We may be at or near the peak of the current cycle. The last downturn in the M&A market was in 2008 and 20092. During that period, total U.S. M&A deal value dropped from $1.56 trillion in 2007 to well below $1 trillion in 2009.
Since 2009, the M&A market has moved into a seller’s market. It is hot right now and businesses are being valued at attractive multiples. Many experts predict more of the same through 20183.
So when is the next M&A market downturn expected? While it is impossible to know, understanding the demographics of the Baby Boomer generation provides some interesting insights.
How the Baby Boomer Generation May Affect the Future Sale Price of Your Business
The Baby Boomer generation is the estimated 70 to 80 million Americans born between 1945 and 1964. Consider the following statistics:4
- Baby Boomers own approximately 63 percent of private businesses in the United States.
- 76 percent of Baby Boomer business owners plan to transition their businesses over the next 10 years; 48 percent in the next five years.
- 80 to 90 percent of Baby Boomer wealth is tied up in these businesses
What do these statistics mean? According to an article in The New York Times, “It is a realization that many business owners are coming to. As the sting of the recession fades and the economy grows healthier, entrepreneurial baby boomers who spent the last few decades building businesses are starting to move on to the next phase of their careers: cashing out.”
With 10,000 Baby Boomers reaching retirement age each day, more businesses will be for sale. Basic supply and demand tells you that as the supply of businesses for sale increases, the demand for any one business will decrease. Thus, as Baby Boomers begin cashing out, it may become more difficult for sellers to find buyers at the price they expect, forcing business owners to lower the sale prices of their business to get a deal done. It will not remain a seller’s market forever. Business owners who want to capitalize on today’s seller’s market should carefully consider accelerating the timing for the sale of their business.
Prepare Now for the Sale of Your Business
Business owners who have no current plans to sell in the near term should not excuse themselves from starting to plan today for the future sale of their businesses.
Consider the following short-term benefits for business owners who make the time to engage in planning for the future sale of their businesses:
Good business practice. Even though a business owner may not be looking to sell anytime soon, it is a good business practice to prepare and operate the business with the end goal in mind—the sale.
Be prepared for an “out of the blue” offer. Many businesses that we have helped sell receive “out of the blue” offers. Not much can be done from a tax planning standpoint if the owner gets an offer too good to resist and decides to sell tomorrow. Less time translates into less planning options.
Serves as a contingency plan. Life happens. An unexpected event can alter a business owner’s goals and objectives. By preparing the business as if a sale were to happen, the business owner has the option to sell the business when and if needed.
Increases bottom line and future value. Preparing the business for a sale may help improve annual revenues and net income as business processes are critically analyzed and improved. When the time comes to sell, the buyer will find fewer things to haggle about, resulting in a higher overall sales price.
Impact of Tax Reform on Business Valuations. The recent tax reform reduced the taxes on most businesses, thus increasing after-tax revenue. This tax effect should translate into a higher value for businesses.
In summary, businesses that are in a position to do so may want to consider accelerating the timing for the sale of the business. At a minimum, each business ought to proactively prepare for its eventual sale—starting today! We expect to remain in a seller’s market with a strong supply of buyers looking to purchase companies. By planning for the sale of your business now, you can prepare for a smoother transition and optimize your after-tax proceeds. Those who fail to plan accordingly may be forced to sell for a value lower than expected, take on unnecessary taxes, or even suffer an inability to sell the business as John did.
1 Not the actual name of the business owner for privacy reasons.
3 https://www2.deloitte.com/us/en/pages/mergers-and-acquisitions/articles/ma-trends-report.html, https://mibiz.com/item/ 25272-deals-aplenty-survey-results-point-to-stronger-m-a-market-in-2018
4 Statistics provided by the Exit Planning Institute
Leland Stanford McCullough IV
Daniel James Bickel
The opinions expressed in this article are subject to change without notice. This material is intended to be educational only and should not be considered investment advice. CAPTRUST does not render legal, tax or accounting advice. Business owners should consult with their legal, accounting or tax advisor when making business decisions such as those described herein.