Josh Harmsen: How to gauge the right time to sell or recapitalize your business

Josh Harmsen

Josh Harmsen, principal, Solis Capital Partners

If you’re contemplating selling or recapitalizing your business, there are a number of challenges ahead. Anyone who has followed his or her investment portfolio over the past year knows that we live in volatile and uncertain economic times. While 2012 began with positive momentum in the equity markets, the underlying fundamentals for sustainable global growth remain significantly challenged. The world’s developed economies remain highly over-leveraged, with the painful process of deleveraging still in its early stages. Deleveraging by its very nature is difficult, painful and costly — often accompanied by increased taxes, reduced spending and volatility.

This is most acutely seen in Europe, where a number of countries are grappling with the prospect of sovereign defaults and stringent austerity measures. While necessary, these austerity measures are creating a significant drag on near-term Euro Zone growth. Worse yet, significant defaults in Europe could trigger a severe economic contagion throughout the world’s economies, leading to global stagnation or even recession. While Europe is currently in the crosshairs, other developed nations, like Japan and the United States, face many of the same challenges. 

So what does this all mean for business owners? First, we are likely several years away from a sustained and steady economic recovery. Second, volatility will continue to be common as long as unsustainable fiscal deficits and excessive leverage remain in the world’s developed economies. Third, the risks of a global contagion and even a double-dip recession are real. Bottom line — economic uncertainty and volatility will persist for years to come.

This new reality has significant implications for business owners looking to retire, pursue a sale or recapitalization in the next two to three years. If you fall into this category, below are some things to consider while navigating these uncertain and volatile economic times:

Establish clear goals that define what you want to accomplish and when.

Do you want to sell or recapitalize? Do you have a succession plan, or are you interested in bringing in an outside partner? What do you want your life to look like in five years? Having a clear set of goals will help you be more targeted and focused, thereby increasing the chances of achieving both your financial and personal goals. 

Start planning early and be prepared to execute within favorable market windows.

Bullish and bearish swings in the market will likely continue. Being prepared to act quickly during these often short-lived market upswings will maximize your chances for a successful outcome. To do so, you will need to spend considerable time up front laying the groundwork for a sale or liquidity event, including speaking with advisers, identifying potential buyers or partners, and beginning to compile the necessary information for due diligence. Being proactive now will position business owners to nimbly approach buyers and partners during favorable market windows. 

Diversification is a good thing.

For many business owners, the vast majority of their net worth is tied up in their business. In volatile and uncertain times, this can be very dangerous, as was clearly seen in 2008 and 2009. Seeking a partial liquidity event can be a prudent way to manage risk while maintaining elements of control and a significant stake in the business. The proceeds from the sale of part of the company can be used to diversify your assets. Perhaps most importantly, it allows business owners the opportunity to seek outside partners who can bring valuable strategic and financial resources to bear. A partial liquidity event will allow you to “take some chips off the table” while maintaining much of the upside in the business going forward.

Josh Harmsen is a principal at Solis Capital Partners (www.solascapitalpartners.com), a private equity firm in Newport Beach, Calif. Solis focuses on disciplined investment in lower middle-market companies. Harmsen was previously with Morgan Stanley & Co. and holds an MBA from Harvard Business School.