Demand for Businesses:
Why Now is a Great Time to Sell
“Deal fever” – unprecedented demand for businesses – is rapidly spreading through the Middle Market business segment and if you’re a business owner or business broker, the prevailing situation impacts you. Middle-market companies are looking to acquire competitors and firms that provide similar or complementary products and services to maintain growth, but also to provide product/service diversity, scale or geographic reach.
The biggest deals get the most attention – Disney’s purchase of Fox, for instance. But the mergers and acquisitions activity in the low and mid- Middle Market sector is as frenetic as I’ve seen it in years. Business brokers are busier than ever and business owners, properly advised, know that now is arguably the best time in a decade to sell.
There’s a Ton of Cash Out There
Booming revenues, lowered corporate tax rates, and the repatriation of overseas earnings mean one thing: lots of available cash on hand. Consumers are spending, stock exchanges throughout the world have been on a tear, governments everywhere, recognizing the need to be competitive to attract business, are lowering both taxes and regulatory burdens. If trade wars can be minimized, this trend should continue and growth should be strong worldwide.
Companies can allocate all this newly available cash in many ways: by shoring up its balance sheet, reinvesting in the business, returning cash to shareholders and buying other companies. The choice varies from company to company and is likely a combination of all four – but our bet is that we see a continued upward trend in M&A.
What This Means for Business Owners
More cash and more buyers means higher values. For business owners – particularly those of mid-market businesses – the demand is increasing. This drives up values and in many cases results in the acquiring company paying a premium above the estimated real value of the acquired business; i.e., an acquisition premium.
An acquisition premium is the difference between the estimated real value of a company and the actual price paid to obtain it. A recent Bloomberg chart shows the historical movement of acquisition premiums over time.
Average deal premium
Source: Bloomberg, as of 6/19/18.
The companies that Bloomberg included in this report are large and many were publicly traded, so the numbers do not perfectly map with the size of the businesses that we and other brokers and M&A specialists work with but the economic environment is the same, the demand is the same, the timing is excellent and the wisdom of bringing your business to market in this environment will likely result in a higher valuation.
Where’s The Action the Hottest?
Retailers are facing the most significant threats and some of them are getting crushed. But by expanding through acquisition, retailers can generally benefit by economies of scale thereby lowering incremental costs while providing greater buying power and a stronger territorial presence and, as a result, gaining a stronger competitive position.
But retailers are only the tip of the spear. Business owners in other industries are beginning to see the benefits of consolidation and scale and I expect that owners in all sorts of segments – from veterinarians, dental practices, home health companies and small real estate brokerage chains to small manufacturers, insurance brokers, title and settlement companies and even business brokerages – will see those same benefits. In our business, we have seen the trend starting in home health companies, independent real estate firms and insurance brokers.
There is a common theme that threads these sectors together – they are all highly fragmented, are dominated by independents and are often multi-site operations. Built up by owner-managers, businesses in these sectors have been out of the M&A spotlight for some time. They now provide an ideal and timely opportunity for a savvy investor or ambitious leader.
One of my favorite examples of such an opportunity is the story of Waste Management, the “garbage” company founded in 1968 and now recognized throughout North America by its ubiquitous green garbage and waste-hauling trucks.
The start was a small garbage collection company in Chicago, IL. By 1972, WM had made 133 acquisitions that resulted in operations in 19 US states and two Canadian provinces.
That industry was fragmented just like the ones mentioned above – and if you own a business in one of those, you may become a target for a larger competitor. (If you think that your business might become a target, you might want to get ready!)
Or you might be intent on growing through acquisition yourself and start researching and targeting similar businesses as potential acquisition candidates.
What this Means for Business Brokers
Needless to say, all this activity has increased the demand for professional business brokers, advisors and M&A specialists. And as Baby Boomers continue to retire – the proverbial Silver Tsunami – this demand will only continue.
In every business transfer, even if the transfer is among family members, businesses will have to valued, deal terms will have to be negotiated, brokers that know what they’re doing will be needed to advise buyers and sellers alike. And there is simply not enough professional business brokers to handle all this business!
If you have ever thought about becoming a professional business broker, now is an excellent time to give such a career your serious consideration. More of us are needed now and the demand for our services will continue to grow for the next 10-15 years as more and more Baby Boomers decide to retire. Business owners in that demographic around the world will need help valuing and selling their business.
If this sounds like an exciting career, I can assure you that it is. Want to join us in helping buyers and sellers reach their goals? If so, take the first step by getting our FREE course outline that explains what business brokering is all about just by telling me where to send it.
In the meantime, listen to the podcast on this page in which I describe what we do.
For many business owners, buying is an effective way to drive growth in a much shorter time frame than the alternative of organic growth. On top of the synergies and operational benefits, it is also a great way to increase the value of a business.
This approach can scale organizations quickly and, in turn, make them attractive to a wider pool of buyers, and therefore more valuable. By acquiring a competitor, a business owner looking to court the interest of a corporate, or potential buyer from overseas, has the potential to make their company larger, more profitable and ultimately more attractive.
In any event, market conditions are driving deal activity. The gap between supply and demand for quality businesses has made this a seller’s market. With strong competition among international buyers, family offices, private equity investors and debt funds, it is a great time to be selling a business.
If you have any questions, comments or feedback on this topic – or any topic related to business – I want to hear from you. Put them in the Comments box below. For example, if you’re considering acquisition as a strategy for growing your business, what are your concerns about the process? What help would you like?
If you’re a business owner that is considering selling, what aspects of the process worry you?
If you are interested in becoming a business broker, what would be the conversation that would get you started?
Whichever category you fall in, start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a profitable week!
#business #howto #sellabusiness #becomeabusinessbroker #businessvaluation