WHEN is the BEST time to SELL?

27 Jul

When is the BEST Time to SELL?

BY: Huxley Nixon

I am frequently asked this question by owners of private companies, especially the boomer generation owner, of which approximately 14,000 are turning 65 daily since January 1, 2011 and this will continue for the next fifteen years.  When asked if they are ready today, many respond -”WHY would I sell into the worst recession in my lifetime?”  They want to wait for the return of the good times.  My response is this may be the BEST of times for the next decade!

Situation

Let’s use my fictitious owner, Bob, majority owner of ABC Builder Distributors, LLC (“ABC”) from my previous blog about the importance of “competition” when selling your company.  Bob wants to buy out two sibling shareholders that would like to retire, invest most of his equity back into NEWCO, and continue to grow the company and exit in five years.  ABC is still the largest privately owned company in their industry segment but Bob wants to find a financial partner to provide his siblings liquidity and to contribute the additional equity that would allow him to acquire his largest competitor without over leveraging the company.  However, since ABC’s valuation has dropped from the $130 million he was offered in 2007 he feels he should wait several years.

Below is a summary of ABC’s financial performance since 2007.  Bob’s industry has been hammered by the recession and ABC’s sales dipped to $150 million and EBITDA to $8 million in 2009 but because the company only carried modest debt on its balance sheet and Bob had placed excellent management and financial controls in place, he was in an a position to remain profitable and take advantage of weaker competitors when the market began to turn.

Historical Facts about ABC:                          ($millions)

2007                2008                2009                2010       TTM-Jun 2011

Revenues                 $220                $200                $150                $160                $175

EBITDA                        $20                  $14                  $8                     $10                    $14

(% of Rev)                   9.1                   7.0                   5.3                      6.2                     8.0

While ABC’s Trailing Twelve Month (“TTM”) revenues and EBITDA are off 20% and 30% respectively from the high-water mark in 2007, buyers are more interested in knowing that you have successfully managed through the bottom of the recession (March 2009) and they are concentrating on performance over the past twelve months and where you are headed versus where you have been.   When looked at in this light, ABC looks like the star it is (especially when compared to its peers).  Its TTM growth of 9.4% and 40% in revenues and EBITDA clearly shows a strong platform to build upon –an ideal equity recap candidate for PEG’s.  ABC may not be at their pre-recession value of $130 million BUT neither is its peer group!  ABC is still the largest private company in their industry segment and NOW is an excellent time to acquire some of its less fortunate competitors.

The Mergers and Acquisitions market (“M&A” Market) for “quality” lower middle market private companies like ABC has rebounded from its trough in Q1 2009.  According to Flashwire and Merger Stat the number of deals and pricing are at or above Q1 2008 levels for transactions below $250 million in enterprise value.  Assuming our politicians will avoid economic suicide over the debt ceiling issue the M&A Market for lower middle market companies should be strong through 2012.

Why should Bob do something NOW?

Value is driven by TWO Factors:

  1. EXTERNAL – Which we DO NOT CONTROL! (Government Regulation & Taxes, demographics, global economic and political risks, WAR in the Middle East, etc.)
  2. INTERNAL – Which we do have control over (strong Management Team, good financial and management controls/systems, competitive barriers to entry, strong margins and revenue growth, etc).

There are several compelling reasons when looking at EXTERNAL RISKS that would suggest between NOW and the end of 2012 will be the best time in the next decade to sell part or all of your company.

Supply

FACT:              There is MORE un-invested cash sitting in Private Equity Funds (PEG’s) earning virtually zero percent interest, than any time in our history – approximately $500 Billion.

FACT:              Most PEG’s have a 10 yr lifespan and need 3 to 5 years to acquire, grow and exit companies they buy.  Most of these funds will have their 5th anniversary by Dec 31, 2012!

FACT:              With Washington seeking ways to increase revenue to help reduce the $14+ Trillion deficit, hedge fund managers and PEG’s are likely targets after the 2012 election.  They make their money when they sell their portfolio companies for an amount over their costs basis and currently these profits, known as their “carried interest”, are taxed at long term capital gain rates (15%).  Many on Capitol Hill want to tax these profits as “Ordinary Income” (39.6% after 2012).

Demand

FACT:              Approximately 14,000 boomers are turning 65 every day since January 1, 2011 and will continue to do so through 2025.  It is estimated that 6 million of these boomer’s own private companies that will not pass to family members. By the end of 2012 only 800,000 potentially could come to market – thus, before the wave crests!

FACT:              By the end of 2015 – 2 million of these owners will have turned 65.

FACT:              Bush-era tax cuts EXPIRE at the end of 2012 – LT Capital Gains rate increases to 20% from 15% (33.3% INCREASE).  In simplistic terms a seller must receive a premium over today’s value to remain the same after 2012.

FACT:              Estate & Gift Tax rules will change dramatically post 2012 restricting the gifting and tax planning options for owners unless Congress acts to reverse the sunset extension date of December 31, 2011.

CONCLUSION:

2011 & 2012 –

  1. Lots of buyers Eager to deploy largest cash overhang in US History – seeking quality opportunities – good valuations.
  2. Boomers WAVE just beginning – fewer deals in the market.
  3. Owners should NOT wait for the “Good old Days” to return – Now may well be the best they will see for the next decade.
  4. FAVORABLE tax environment compared to 2013 and beyond.

2013 & Beyond –

  1. DECREASING Buyer Pool (Investment window closing for Private Equity funds started 2006-2007).
  2. Boomer wave begins to crest (2 million sellers at end of 2015 and 4 million by 2020) versus declining number of buyers!
  3. LT Capital Gains rate 33.3% higher after 2012 and pressure to increase taxes to reduce deficits going forward.
  4. Probability increases for higher interest rates.
  5. UNCERTAINTY regarding US and Global economy – Inflation, Negative Demographics (declining birth rates to support exploding aging populations) in most industrialized/westernized countries, Destabilization of Middle East and Central America, etc.

Author: Huxley Nixon has been involved in M&A (mergers and acquisitions) for 35 years as a buyer, seller and intermediary.  He is founder of the M&A MARKETPLACE by CHC (www.mamarketplace.com) where the buyer pays all success fees and the process is only 120 days.  For owners of private companies considering a sale of part or all of their company – it provides a very quick, confidential and competitive alternative to current options less transparent and more disruptive for the owner.

DISCLAIMER:  Opinions and conclusions in this post are solely those of the author unless otherwise indicated.  This article is for general information purposes and is not intended to be and should not be taken as advice on any particular matter nor is it intended to be a solicitation regarding any securities transaction and or investment relationship.  For those desiring additional information please visit our website www.mamarketplace.com.

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