We’re just coming off the back of a month when the Dow Jones lost almost 10%. Should this mean anything to you if you were planning to sell your business?
We should try to separate perception and reality; future expectations and historical performance and discuss how they intersect.
While the stock market is a poor indicator of future M&A Activity and valuations, it may be used by a private business owner to gauge the prevailing sentiment for the economy in the next 6-12 months (the length of time it can often take to sell a privately held business). While perception differs from reality, perception is still a significant driver of business valuations. For example, a buyer may pay more for a business when the future outlook is strongest, rather than when recent historical performance is at a peak.
Should any of this factor into a decision to sell a business?
Whether or not it should, it oftentimes does. Even if markets recover in the coming weeks, significant volatility has an impact on investor confidence, which can also be true for owners of privately-held businesses. Consequently, we have already seen a number of business owners coming off the sidelines in the last week to initiate the sale process for their business.
If this is a temporary blip in economic data, then we’ll see minimal impact on business valuations for the remainder of 2012. The alternative is that sustained weak economic data, with a corresponding stock market sell-off, could lead to lower valuations than earlier in the year when the outlook was more positive.
How do we expect this to impact M&A activity for midsized Oklahoma businesses for the remainder of the year?
Our expectation is for an increase in the number of Oklahoma private businesses that start the sale process in the next couple of months. So long as the economy continues its longer-term recovery, then we should be in good shape to realize a strong purchase price before the end of the year end and also before 2013’s substantial tax increases.
This volatility may not even be a bad thing if it gives an impetus to owners to start the sale process in time to close a deal this year, as a bigger problem could be the number of business owners who start the sale process too late in the year and either sacrifice price or deal structure to close a deal before year-end, or miss the year-end deadline and this lower tax opportunity.