Business owners who have been considering selling their company may be thinking twice. A tight credit market and a displaced economy have left some wondering what opportunities are available and if the time to sell has already passed them by. While it is true that transactions in today’s climate are faced with new challenges, deals are continuing to get done.
Henry Hissrich, director of new business development at Harris Williams & Co., talked to Smart Business about what today’s market means for business owners considering a sale or acquisition and what they can do to navigate this environment.
What are the implications of today’s market to business owners considering a sale or acquisition?
The middle market, which we define as transactions less than $1 billion in value, has historically accounted for at least 90 percent of all M&A volume. In today’s volatile economic environment, that dominance is even more pronounced. Mega-deals have fallen by the wayside because of tight credit markets and, while middle market transactions have certainly felt the effects of these challenges, there is still some activity, particularly for well-performing companies.
For owners of struggling companies who are not compelled to sell, now is not the right time. Working through this period and demonstrating that the business can weather through all points of a cycle is a strategy that is likely to reap rewards once the market rebounds. Conversely, there are companies that continue to perform well or reasonably well despite the weak economy. These are the companies that will be attractive to buyers in any environment and, while multiples have declined from the peak of 2006 through the first half of 2008, valuations can still be attractive in historical terms.
What advice can you give business owners who want to sell but are concerned about timing?
The decision to sell a business easily ranks among the most difficult and important of a business owner’s career. While today’s environment is difficult, opportunities to gain liquidity or exit are available for well-performing companies.
If you are considering a sale in the near term, now is certainly a good time to get the business prepared. Once the market turns around, there will be a flood of pent-up supply, so it is best to be ready when the right opportunity arises.
Some business owners have also benefited from obtaining minority investments from private equity groups, many of whom are actively looking to partner with companies led by strong management teams. These transactions are less reliant on debt, which, in today’s market, is expensive and in short supply. Because there is an abundance of private equity capital that needs to be put to work, creative deals structures such as minority investments are becoming more prevalent. Many companies are exploring similar alternatives with success.
Are certain industries experiencing more activity than others?
Absolutely. Certain defensive industries, such as health care, technology and consumer staples, among others, are proving their resiliency in the current environment. If industry dynamics are favorable for your business and it’s performing well, you may be surprised at the exit opportunities that exist.
What piques buyers’ interests?
Companies that have a unique and tangible value proposition, effective management team, strong financial performance and compelling growth characteristics supported by sustainable competitive advantages will almost always generate interest from the buyer community. Now more than ever, businesses need to have a demonstrated track record and be able to show that they can weather difficult times.
How can companies prepare for a sale process?
The sale of a business is impacted by a variety of internal and external factors. It is important to weigh all of the factors that are important to you and look to the advice from an experienced sell side adviser to help determine the right strategy.
Business owners should prepare in a number of ways, from basic housekeeping to having a clear growth plan for the future. Owners should try to examine their business from the vantage point of a prospective buyer and address any potential concerns prior to marketing the company.
For many middle market companies, the reasons why an owner may opt to sell a business are not limited simply to market timing and returns. Knowing your objectives and the steps that need to occur to meet your goals are key for preparation.
Harris Williams & Co. (www.harriswilliams.com), a member of The PNC Financial Services Group, Inc., is one of the largest mergers and acquisitions advisory firms in the country focused exclusively on the middle market. Harris Williams & Co. represents private equity groups as well as publicly and privately held companies worldwide. Member FINRA/SIPC.
©2009 The PNC Financial Services Group, Inc. All rights reserved.
HENRY HISSRICH is director of new business development at Harris Williams & Co. Reach him at email@example.com or (267) 675-5900.