Without a doubt, 2020 will go down in the record books as one of the most disruptive, confusing and disquieting years in modern history. Cities rocked by riots, hospitals overflowing with COVID-19 patients, election results challenged, the media not trusted by segments of the population, a nation so polarized that civil discourse is almost impossible, and an economy turned upside down. It is no wonder business owners are seriously worried about their futures. What comes next?
With “shut down” orders changing almost weekly, small businesses are struggling to stay afloat. According to the National Federation of Independent Business, a nonprofit small-business advocacy group, “If economic trends continue at this rate, one in five business owners anticipates not making it through the end of the year.”
But, as bleak as 2020 has been, 2021 is predicted to be a positive year for mergers and acquisitions (M&A). With COVID-19 vaccines being distributed and projections showing that 70% of the nation could be vaccinated at some point in the third quarter, the economy could be roaring back by the end of that quarter, if not before. That is good news for those business owners wanting to sell their businesses in 2021.
What Should Owners Know About Selling Their Businesses?
M&A professionals are optimistic about activity over the next 12 months. There is plenty of money to invest. According to Dykema’s16th annual M&A survey from October, CEOs and CFOs are the most optimistic they have been in the 16-year history of the survey. Dykema is a national law firm serving businesses worldwide.
The survey says, “Seventy-one percent of respondents expect the M&A market to strengthen over the next 12 months, up from 33% in 2019. The rise in optimism reflects market conditions and a belief among respondents that the worst is behind them – with both financial and strategic buyers seeking opportunities in a crippled economy. Furthermore, 60 percent of respondents say their outlook for the U.S. economy is positive over the next 12 months.” Other major institutions, including Morgan Stanley and Bloomberg, view 2021 M&A activity positively.
General Equity, an investment bank, representing mid-market business owners, recently stated that they have closed more transactions in the past six months than in the past decade. One strong indicator of the strength of the M&A market is the number of nondisclosure agreements being signed. NDAs are a strong predictor of potential deal closings.
Sectors seeing the most M&A activity for the next 12 months include: (1) Automotive and related businesses; (2) Health care; (3) Technology; (4) Consumer products; (5) Financial Services; (6) Business services; and (7) Educational services.
Is This the Right Time to Sell?
When considering going to market, owners should ask themselves if this is the right time for you to sell? Or should you wait? Consider these three issues:
- Examine your motives for wanting to sell. Is it for health reasons, burn out, divorce, retirement, or a new competitor? If it is a new competitor, remember, they may be suffering just as much or more than you are. While other reasons to sell your business are more urgent, such as a loss of major clients, or loss of a partner, ask yourself if you can recover? If it is retirement, you can be more flexible in your exit plans.
- Determine if the COVID-19 pandemic has affected the “enterprise value” of your company. Often, deal structures change based on the buyer’s perception of the enterprise value of your business. A buyer may claim they do not know how to value your business given the effects of the pandemic, so they propose a series of performance payments over time. Don’t structure the sale of your business as an earnout. Instead, secure an independent certified valuation and determine which is the best structure to complete the transaction.
- Analyze yourself and your business. Are you emotionally ready to sell. Some business owners are emotionally ready to sell before they are operationally ready to sell. Diligently prepare your business before you go to market. Doing so will yield a higher selling price and better terms and conditions. Make sure your financial books and records are in pristine condition; look at your inventory and determine what, if anything, is obsolete. Whatever is obsolete, get rid of it and turn it into cash. Update your financial proformas in light of the pandemic’s effect on your future operations.
Complete a self-imposed due diligence on the operations of your business. Look for your weaknesses and correct them.
Remember, selling a company is like a beauty contest. The business that shows best sells first.