Considerations for selling a midsize business in today’s market
For several years now, professionals in the financial markets have been advising their midsize clients the time was right for selling their business. Sale multiples have been at all-time highs, the private equity market has been awash in capital and expectations were such that the market could not continue to be as good. So, is it still a good time to sell a midsize company or have we missed the market?
The market for selling a midsize West Michigan company continues to be strong. Through 2017, Pitchbook reports 2,509 private equity transactions were completed with a value of $346 billion, the highest in recent history. Through the first half of this year, 1,358 transactions were completed with a value of $179 billion, more than half of last years’ totals. The message for sellers of midsize companies is the market is open and transaction volume continues to be robust.
Further, there is plenty of capital available to buy good companies. In the private equity universe (including large and midsize investors), $677 billion is available to invest according to Pitchbook. Investors across the market tell us that they are motivated to make investments that adhere to their investment individual criteria.
What does all this mean for company values today? Measuring value is often accomplished by observing the ratio of value (sale price) to EBITDA (approximately operating cash flow). According to GF Data research for the first half of 2018, and focusing on company value between $10 million and $250 million, the multiple ranges from 5.9 to 9.1, depending on the industry and size of the company. Note this is down from 6.4 to 9.2 in 2017, indicating that transactions in the recent six months had a lower value than last year.
This data presents a mixed message to a West Michigan business owner. On one hand, the market is active and has capital to invest. Conversely, at least across a broad range of midsize transactions, investors are paying marginally less for the companies being sold this year.
Do the data imply the seller-friendly market has turned and it is time to act quickly to sell a business? Yes, but other dynamics should be considered, as well.
The current economic environment in West Michigan affects all companies to some degree. If the effects of regional or national economics are positive, and the business owner has the desire and ability to wait, selling at a future date may be considered. However, if the economics are negative or uncertain, they may lead an owner to conclude the time is right for a sale.
Stating the obvious, a growing company is worth more than if its sales and profitability have remained stagnant or, worse, declined. Regardless of the owner’s economic view, the risk of negative future performance may be great enough to motivate a sale. Personal circumstances, including declining health or retirement, can decrease an owner’s tolerance for this risk and lead to a sale decision.
Clearly, timing the sale of a business involves weighing many competing factors. Personal circumstances present strong motivations in deciding whether to sell and often are difficult to quantify. The market for buying and selling companies is a bit easier to quantify. It is still a good time to sell on that basis and with some urgency if recent downward market value trends continue.
Brooks Crankshaw is a managing director and partner of The Chicago Corporation, a boutique investment bank specializing in raising debt and equity capital and providing M&A advisory services to company owners wishing to sell their businesses. He is a Michigan native and manages the Grand Rapids office of the firm.