This year might be the best time for your business-owning clients who are approaching retirement age to sell their enterprises. In recent months media and professional service firms have been buzzing about the benefits of such deals:
“M&A Deal Activity on Pace of Record Year” (The Wall Street Journal, Aug. 10, 2015)“The M&A Market is Poised for Continued Growth in 2015” (J.P. Morgan, July 2015 )“2015 Could be the Best Year for M&A” (Forbes, June 2015)“Pace of mergers and acquisitions to extend – or even accelerate – in 2015,” (Deloitte, June 2015)
And the timing might not last. Business sale pricing, like most economic events, is subject to certain natural and recurring cycles. Most M&A advisors agree that the economy will experience a wave-like motion over time, with cycles commonly running in six to 10 year waves. Acquisition opportunity normally rises when a) the cost of capital is low, b) growth opportunities abound, and c) significant advantages arise, capitalizing on technology changes. Sellers are benefiting at peaks reaching all-time highs.
The timing is right also for obtaining cash to invest this year. Markets are humming at relatively high levels. Prices will likely moderate and allow for solid investment-buying opportunities over the next two to three years.
Alas, the good times may not last. Owners who decide to retain their businesses may need to wait another eight years or more to get the same price that a sale this year could bring. That’s a long wait for someone nearing retirement age.
But selling a business can be hard for many people, as it can signify a loss of a career, or a high moment in many careers. Some owners may be non-committal about the prospect. The uncertainty usually stems from these basic concerns:
1) “I’m really not ready to retire for a while.”
That’s OK, and it’s certainly the right of every owner who has ever worked to build a business. But the owner needs to think hard. The market is great today for selling a business, and if they wait to commit at a down-cycle moment, they may discover that they’ll need to hold on another six to eight years to capture the market at an equally brisk moment. The right time to sell is always when the business is experiencing a bounce. Older owners often become wary of reinvesting to nourish growth. Don’t slow down before a sale. It will hurt market appetite for your enterprise, and hurt potential pricing.
We sold a company in March for two owners who were close to 60 years old. Their health was strong and they weren’t eager to retire. Yet they had growing pains -- too much, too fast in recent years – and faced constant demands for new investments to keep up with new business opportunities. They considered several suitors and chose one, a private equity fund enthusiastic about the existing owners continuing in key rolls.
My clients sold with 90% of their cash at close, even after reinvestment of a small piece. To enhance incentives, the buyer gave them an ongoing ownership of 20%. The former owners said the equity fund leaves them in charge of the areas they are most proficient in, but provides help and knowledge for all of the things they don’t know how to do. The fund has a fixed buyout provision should the owners want to retire before the equity fund sells.
2) “I really am hoping to leave the business to my son instead of selling.”
Alas, Dad’s dream of passing the company to his sons is often not the dream of the sons. Some accept because they feel obliged to. Assess the real capability of the successor generation to manage a takeover. Also, be sure new and old generations agree when the current owner will end command. Our firm have seen many sales at a child’s suggestion, to the father’s disappointment. If financial freedom and security can be gained without the lifetime of servitude, it’s at least worth considering.
Several years ago we suggested to an owner of a thriving general contracting business focused on warehouse space, that he sell. He said he wasn’t ready and hoped to pass the business along to his son, who was in the room when we talked. The son objected. He said the market timing was excellent because the company had a new contract. The son said he didn’t need to run this company for the upcoming decades, and would be delighted if the firm was sold then. We sold that company for double the price we expected. The son, the father, and daughter all profited in excess of $20 million each. Each of them retired and lived a life with no financial pressures.
3) “I don’t have anyone here ready to run this company without me.”
Buyers who have the money to make the purchase of your company know something about business and have capital to fund new initiatives, even hire new people, as needed. Buyers know that an owner CEO needs to be replaced. Often sellers are amazed when they learn how quickly their staff develops with new support around them.
Several years ago we sold a plastics thermoform company run by a sole proprietor. The owner said one of his key people was outstanding and could learn to be the general manager. The buyers were skeptical, but stayed to see the deal through. The winning buyer brought in someone to serve as president. The new guy took over, but the second in command under the previous owner stepped up in every way. The new guy paled in comparison to the younger second in command. A year later, the Number 2 employee assumed the presidency. In addition, he was given an ownership stake in the company, to the tune of about 20% in two years. The company doubled in size in the next five years.
4) “I might like to pull some chips off the table to improve my family’s financial security, but I really don’t know what I’d do with myself if I didn’t own this company.”
Life can be vastly different after someone sells, but that includes a more relaxing, enjoyable life not only for the owner, but his family and friends. Employees can grow quickly when they have the money and unbridled enthusiasm of new owners behind them. The right way to end a successful business-building career is not to wait for your health to fail.
We sold a company in Los Angeles focused on handling materials and building conveyor systems. The owner was 68 years old, and had talked with us about a possible sale five years before. He worried about what he would do after. He made the move upon the urging of his wife. It’s been nearly 10 years and they have lived happily since. He has told me more than once that selling his business was probably the best move of his life.
Encourage your clients to not be afraid and to consider selling this year, while the timing is right.
Deborah L. Douglas is president of the Douglas Group, a firm that specializes in the sale of privately held companies.
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