Ingrams July 2023
planning. The best thing an owner can do to set themselves up for a successful exit is to build a transferrable business and to start planning their exit. Q: What kinds of other factors might not be market-driven? A: Usually, that’s because you’ve lost a big client, spent too much on a test product that didn’t go well, or just taking your eye off the ball. While an investor will look at the previous five years, the price is usually going to be based off of the most recent 12 months, with a multiple of that performance. If you’ve been consistent the last few years, and steadily improving, that will lead to a higher multiple. If you’ve been inconsistent, with up and down years, that could be worrisome to an investor and may command a lower multiple. Q: Have current fundamentals changed motivations for sellers to do a deal now, rather than wait, or to wait, hoping for better conditions? A: As we’ve talked about, rates are just one consideration when selling your business. Honestly, the impact rates will have on the value of a transaction are min iscule compared to the positive effects of properly planning for an exit. Business owners rarely ever approach us because they’re trying to time the market. Seller’s are usually looking to exit because they want to spend more time with family or pursue a new venture. I will point out that timing your exit around business success is an excellent strategy. Some of the most successful exits happen after an owner has spent years executing a strategic growth and then goes to market. Showing years of consistent and improving performance should result in a favorable valuation. Q: How is all that shaking out with valuations this year? A: I can be put on a transaction, without getting too deep into the minimum debt-service coverage ratios required. When rates are up, loan payments go up and maximum valuation multiples
decrease because buyers must be able to pay the debt with the businesses cash flow. This is only one of many considerations when determining valuation multiples. An additional, and in my opinion more important, consideration is the quality of financial performance. Companies with consistent financial performance that’s easy to understand should command higher valuation multiples. I should note that small businesses are usually priced on a multiple of cash flow. So, when I talk about financial performance I am referring to the bottom line. However, the biggest issue regarding valuations are still the seller’s expectations. It’s very common, especially in the first few meetings with an owner, for expectations to be a little higher than what the market would command. That’s why we encourage all owners to work with an M&A advisor to get an estimate of their businesses value. That way, there aren’t any surprises when we go to market. Q: How do you handle owners who feel that, given economic concerns, they might have waited too long to sell? A: You always want to avoid a situa tion where an owner is forced to sell. That’s agnostic of the market. You don’t want to be in a situation where the owner wakes up and maybe has a terrible medical con dition and has to sell or has been dealing with burnout for years and just wants to go to market. Even in that situation, a good adviser will do everything to maximize the value of the deal. And a good business will sell at a solid multiple. It’s important to understand that it will take nine to 15 months to execute a sale, from the initial consultation to closing the deal. Considering an owner is often asked to stay on for a transition period, that could push to 24 months. Sellers could start the process in a bear market and by the time they’ve exited it could be a bull market. Timing is a game for the public markets. Selling small to mid-size companies is not about timing, but about planning. That’s the best thing an owner can do to set up a successful exit: Start planning .
“Selling small to mid size companies is not about timing, but about planning.” — J.B. Mason, Managing Partner O’Keeffe & O’Malley
asking for too high of a valuation. In a low interest rate environment, a buyer may be willing to overpay a bit because they can get competitive financing. However, at current rates, buyers have a much lower willingness or ability to overpay. It should be noted that this is a bit of a simplistic way to look at things as price is only one piece of the deal-making puzzle. If either party is sacrificing on price then usually the discrepancy is made up in the terms. Q: You’ve mentioned the need for longer-range planning on a sale by owners, but when economic funda mentals change the way they have in a comparatively short time, might those efforts become moot? A: In a rapidly changing economic environment I would argue that plan ning for your exit is even more important. Timing is a game for the public markets —selling stock, going public, or mega mergers. Selling a small to medium sized business isn’t as much about timing as it is
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I ngr am ’ s
Kansas City’s Business Media
July 2023
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