We were recently asked by a client if current market conditions are right for the sale of his company.
There are two parts to the question: “current market conditions” and “for his company.” The primary driver of the decision should be an analysis of his particular, unique business. Current market conditions are an external driver of his company’s performance and also impact the price a buyer will pay for his company, but they are only one of many factors that impact business valuation and timing for a sale.
Economy vs Sector vs Company
As we publish news and data analysis, we focus primarily on M&A transaction activity in particular sectors, but rarely an individual company. However, our client’s question really only relates to his company, which is more dependent on his niche sub-sector within the industry and most importantly his unique business within that sub-sector.
As for the US and global M&A market – we are on the tail end of a ten year growth in the economic cycle and many commentators are suggesting it’s a great time to sell a company. Valuations are high, in part due to low cost of capital to finance a transaction. For a more complete picture of current M&A activity and outlook – our most recent quarterly report is here:
Positive industry performance and one or two significant deals in a sector can trigger a flurry of M&A activity and peaks in acquisition demand.
With reference to the second part of the question “for his company”, it is more important to consider the unique business characteristics, historical performance and future prospects of the specific company within the context of the broader market conditions. In reviewing your own business, you may want to consider the growth prospects and current limitations of the business, intellectual property, key people (reliance and relationships), operational efficiencies, systems and processes, scalability, capex requirements, competition, customer outlook, customer concentration, cyclicality, recurring revenue, cash flow cycles, as well as more traditional liabilities and assets.
Our only qualifier for 2020 is the ease of closing a sale transaction in this market. High valuations and a late stage economic cycle are more challenging times to clear due diligence in a transaction. Buyers are bringing in every type of outsourced due diligence to scrub every detail of the business, both historically and as the company will be under new ownership as an integrated entity. In recent transactions, we’ve had more than 30 outside due diligence professionals engaged in a single transaction – ranging from benefits, HR, accounting, tax and legal to environmental, operations, pricing and margin analysis, information technology and intellectual property.
Forward planning is critical to maximize the sale price of a company. Our team at ClearRidge stands ready to clear all pre-emptive due diligence with your company, research, identify and screen prospective buyers, create all requisite materials, data analysis and memoranda, confidentially market the business, lead negotiations on price and terms, and manage the buyer’s diligence teams for you.
At any time, you should be looking 6 months out as a reasonable expectation to clear diligence and complete a transaction. If you start sharing information with a buyer in October, you’re reasonably looking at Spring to close the transaction – so that’s another consideration too. Time flies in M&A.
For recent ClearRidge transactions and current engagements, click here: clearridgecapital.com/recent-transactions/