Decision Point 2010 Quickly Approaching for Mergers & Acquisitions
By Bill Quish, Mergers & Acquisitions Advisor and Certified Exit Planning Advisor (CEPA)
Timing the sale of a business or a merger & acquisition can be as difficult as timing the stock market. For a host of reasons, most business owners don’t get merger & acquisition timing right! Many owners regret not having sold their businesses back in 2007 and early 2008 when the economy was strong and valuations in general were higher than historical norms.
The recession has shaken the confidence of many business owners. Some owners question whether their business will ever be the same. Others may wonder if it could take five or more years for their business to return to normal profitablity. A lot of unknown risks (e.g., the economy, inflation, competition, financing, tax increases, technology, wars, pandemics) can rear their ugly heads over that period.
With the economy stabilizing, many business owners we talk with are telling us they want to see how 2010 plays out before engaging a mergers & acquisitions advisor to put their company on the market. Several private equity and strategic buyers we communicate with regularly are hearing the same thing. Despite what you may be hearing, today’s mergers & acquisitions market has a sufficient number of buyers willing to pay fair prices for businesses with viable futures and above-average performance.
So what decision should business owners make if they are on the fence about selling their company? By the end of March or April, many business owners will know whether they have a legitimate shot at meeting their 2010 profitability plan. If by this point the trend is your friend, you should consider engaging a mergers & acquisitions advisor to put your company on the market. An experienced advisor will sell your 2010 plan to potential buyers to help you maximize your company’s valuation. Recognize that because it typically takes six to nine months to complete a merger & acquisition, it is important to start the process early if you need to complete the transaction in 2010 for tax or other reasons.
Do you want to wait until 2011 to sell your company? If so, you need to be very confident that your company’s profitability will increase sufficiently between 2010 and 2011 in order to offset likely increases in federal capital gains, ordinary income, and state taxes. In 2011 combined federal and state income taxes are likely to increase by between 5% and 10%. This means that you will need to increase your 2011 profitability by similar percentages in order to receive the same after-tax proceeds that you would have pocketed if you had sold at the lower 2010 profitability level. No one knows what 2011 M&A valuation multiples will look like, so you can’t count on 2011’s valuation multiples being higher to offset these proposed tax increases. You certainly should not rely on seeing the M&A valuation multiples of 2006 through early 2008 come back for a long time, if ever.
Entrepreneurs are an optimistic breed by nature. That being said, most successful entrepreneurs I know are realists. I don’t know about you, but I don’t get a warm and cozy feeling about the economy despite the attempts to stimulate it with generous monetary policy and questionable stimulus plans. What I am saying is that if today you can get a mergers and acquisitions valuation for your company that will support your future lifestyle, you should consider monetizing your company and let the buyer take the risks of navigating the uncharted economic waters that lie ahead.
Bill Quish is a Mergers and Acquisitions Advisor and Certified Exit Planning Advisor (CEPA). He is a Senior Managing Director at Lyons Solutions, LLC. He can be reached at 860-391-8672, firstname.lastname@example.org or email@example.com.
Copyright 2010 Bill Quish Lyons. All Rights Reserved.