Private equity has nearly half a trillion dollars looking for businesses to buy now.
Improved PE returns signal an improved environment for business owners looking to sell in 2011.
Is this the year to sell your business? Maybe yes. Maybe no. As with most complex situations…it depends.
In general, we think selling in 2011 will be better than 2010. Will 2012 be better still? We don’t know. It could be better. It could be worse. Predictions are difficult….especially the further out you go. For now, let’s stick with 2011.
We believe 2011 will be a better selling environment than 2010 because…
#1: Senior debt lending is thawing a bit.
It has been a difficult two years for prospective borrowers…especially if you were trying to borrow on cash flow alone. There are signs of improvement. Will it be like 2007…no. It may never be like that again. At least, not for a long time. Of course, more senior debt from the lender means more leverage for the buyer…and the ability to pay more for your business. Imagine that.
#2: Private equity has lots of money to move.
They have to…or give it back. We think they’ll find ways to move it. One way is just to put more money in each deal. According to one source, in 2009/2010, private equity was putting in an average of 55%-60% equity, and pricing deals at 25% returns. Seems aggressive. Maybe too aggressive. But it depends on which side you are on. Lower required returns mean the PE firms are willing to pay more for your business. And it looks like lower returns are here to stay…at least for a while. Bad for private equity investors. Good for private business owners.
#3: Good businesses are getting harder to find.
At least, that’s what we see. PE firms are getting more desperate. What was a $2M EBITDA floor in 2007 is now $1M…or less. Some are entertaining deals as low as $500K. Warts too ugly to touch in years past are now mere blemishes that can be easily cured. That’s what they tell their investors anyway. Bottom line…if you have a good business, you can be at the center of attention.
So is it time to sell? Again…it depends. If you have health problems, you are burnt out, or you just can’t grow your business anymore, it’s always time to sell. Holding on is never the right answer. And it usually ends badly.
For others, we suggest answering the following two questions:
Question #1: Is your business growing despite the economy?
Question #2: Would you prefer to sell your business sometime within the next 5 years?
If you answered yes to BOTH questions, then 2011 is probably the year to sell.
Why not wait until 2012 or 2015, you ask. Too risky, we say. There are always risks in running a business. But we see lots of risks beyond the normal ones. Risks you can’t control or easily mitigate.
Of course, these are complicated matters. No two businesses are alike. No two business owners are alike either. We find it’s better to talk these things through. Go over your options. But we also find that 9 times out of 10, owners wait too long to sell. It’s an awful regret to carry.