Post on 16-Apr-2017
Presented by:Nick Stanley
Partner
Timing the Marketor
“When to sell my business”
Three Primary Motivations
• Strategic business reasons – Competitive position of company within the marketplace– Company needs some combination of capital and talent– Industry trends, and increasing speed of evolution
• Investment reasons– Risk, Return, Liquidity, Yield– Efficient frontier, modern portfolio analysis– Is the return I’m receiving adequate for the risk I’m taking?
• Personal reasons– Health & Age– Allocation of time and resources– Appeal of an alternate investment/career– Family dynamics
Three Realms to Consider
CompanyGrowth Stage
Current TrendsCompetitive Landscape
Technology and IPProduct Pipeline
Capital RequirementsManagement Depth
M&A MarketEconomic Outlook
Interest RatesAvailability of Credit
Supply of Quality CompaniesAggressiveness of Buyers
Number of Buyers
OwnersOwner Alignment
Age, Health, DivorceEstate Planning
Personal Retirement TimingFamily Considerations
Liquidity, Risk, Yield
Value Considerations
• Company history, maturity
• Revenue size, growth
• EBITDA, EBITDA growth, EBITDA margin
• Capital requirements
• Technology and Intellectual Property
• Product line, product pipeline
• Competitive position within the market
• Performance of company in relation to performance of market
• Quality and stability of management
• Legislative and regulatory environment
• Brand value
• Barriers to entry
• Growth prospects
Transferable Value Considerations• What is the company worth without you?
– Move from working in – to working on the business• Management Depth• Customer Concentration• IP issues• Financial Statements• Non-related assets
• The value generation of planning is significant– Larger than most business owners realize
• Easier to preserve value than create it– Yet most business owners focus on the opposite
• Some planning techniques require 5 years to mature– Most exits will require a 6-24 month owner transition
Company – don’t wait too long
All companies have life cycles.Do you know where you are in the cycle?
The consequences of waiting too long can be dire.
Renew:Capital & Talent
Why sell when things are going so well?
Remember 2008?The market can change quicklyThe exit window can close completely
• If you recognize that the company is on the downside of the cycle – so will the buyer • Owners would be wise to recognize it is a significant challenge to find buyers for
companies that have passed their peak.• Buyers are buying a vision of the future, and most require credible growth prospects. • Sell while there is still clear, identifiable upside available.
Owners - while I can still enjoy it
Quality of life matters Financial peace of mind is a reward worth the effort
Mortality is certain and unpredictable
Where is your nest egg? In one asset or 50? In one industry or several? In one country or global?
The golden goose can have a dark side• Owners tend reinvest the vast majority of free cash flow back into their business. • Most owners, due to their intimate knowledge of the industry, and an entrepreneurial
optimistic bias, tend to dramatically underestimate the risk inherent in wealth concentration within their business.
• Approaching age 60, this concentration risk becomes inappropriate. – Concentration risk, can become a real and present danger– Excellent markets eventually turn to average markets– Failure to optimize the exit could force a dramatic downward shift in lifestyle
• History is littered with examples of owners that waited too long to exit or transition
• Don’t let the golden goose prevent appropriate diversification.
Market – Currently Excellent (2016)
Historically low interest rates
Bank and Non-Bank lenders are aggressive
Competition high among financial buyersStrategic buyers are forced to be more aggressive
$466 Billion PE overhang
The M&A Cycle• The M&A market is also a cycle, and one with meaningful volatility
• The difference in acquisition multiples in an excellent market vs. a good market is significant
• For a typical privately held business, it could be 2x to 3x additional turns of EBITDA
• How long will the strong market last?
The Delta is Large
• Sell now in excellent market– Ebitda of 5 x 7 (excellent) multiple = 35
• Try to grow the company, then sell in a few years in average market– Ebitda of 6 x 5 (average) multiple = 30– Ebitda of 5 x 5 (average) multiple = 25– Ebitda of 4 x 5 (average) multiple = 20
• In poor markets, the economics and the number of buyers are reduced– Ebitda of 4 x 4 (poor) multiple = 16
– May not be able to find a buyer
Balance and TimingBalance and prioritize the 3 primary motivations & 3 realms.
All else being equal - A strong market should trump conventional timing.
Consider making a significant timing adjustment to align with current market conditions and take advantage of valuation opportunities.
Beware the bear hug
• Don’t get seduced by a single buyer– Easier process, until the negotiation begins– Shorter time, but more likely to fail– Typically less value, but the seller never knows for sure – Impossible to negotiate effectively with only one buyer– Re-trading of initial offer is common. – Walking away is expensive
• Failed sale attempt history• Difficult on owners and management
• Don’t let someone else set your timing
• If the time is right, engage in a process
Proactively Manage the Circles
• Be proactive owners tend to underestimate the impact of pre-liquidity planning
• Owners tend to underestimate the value of timing the M&A market• Asset traders are engaged in market timing - business owners should do the same
• If not ready for a complete exit, consider a partial exit– 2nd bite of the apple strategy - allows for a half step out– Defers the emotional loss of identity for another 5-7 years
Get the best advisors availablePre-liquidity estate planning Pre-liquidity tax planning
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