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Entrepreneurs and business owners tend to be hardworking, type-A, perfectionists and I think this might be the root cause of their fascination with attempting to "time the market" for a business sale. Timing the M&A market is not at all like trading securities. There is no active and visible market for your specific company, which means that trying to time the point when you can complete the "perfect" sale is a very dangerous game. When valuations for companies fall, they generally fall hard and take a very long time to recover.

This is an incredibly good sellers market

shutterstock_581015440.jpg2016 was and 2017 is shaping up to be the best sellers market I have seen in my 25+ years of investment banking. There is incredible pent up demand from buyers, financing is cheap and banks and other lenders are being lenient with covenants. It is the perfect formula to drive up valuations.

This market won't last

While I can't tell you when this frothy, high valuation market will end, I can say for sure that it will come to an end. There will most likely be a trigger of some sort that brings lending back to historically normal levels, which will in turn impact valuations. In addition, there are a record number of baby boomers preparing to sell businesses in 2017 and 2018, and while this is great news for investment bankers, it means that the laws of supply will begin to shift in favor of buyers. This increase in supply of available businesses will impact valuations more slowly, but certainly have an effect.

When it turns, it generally goes away for years

The last time the market was at these levels was 2007. It took until the end of 2014 or even early 2015 for business valuations to return to 2007 levels. That's seven years to complete the market valuation cycle. This is the reason why it worries us to hear business owners say "I'm just going to run my company for a year or two". If the market disappears while you are waiting one or two years to sell, you will in essence be forgoing your retirement/Arizona living plans/golf lifestyle for potentially 8 to 10 years.

If you don't have a compelling reason to continue to run your business, right now is a great time to consider selling.

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Your company cannot outgrow a falling marketplace

Even if you told me that you had great plans for the next year or two, I would ask you to consider selling now. Because companies are generally valued on a multiple of cash flow, it is almost impossible to outgrow a falling market. Let's say, for instance, a company was making $5 million of cash flow and expected to make $6 million next year. If current valuations for that type of company average 8.0x cash flow, the business owner would receive $40.0 million. If valuations drop 20% to 6.4x cash flow next year, even though that business owner grew his bottom line by a really impressive 20%, he would be making less on the sale of his business ($6 million times 6.4x or $38.4 million). Just by way of reference, in 2008 the S&P 500 lost 50% of its value, private equity deals were down by 72% and values on middle market transactions were down 50%, and that was for deals that got done (source: McKinsey & Co. "What's Different About M&A in This Downturn", Jan. 2009). Many other transactions died on the vine in 2008.

Waiting just one or two more years to sell your business might fit your personal exit plans perfectly, but the mergers and acquisitions marketplace doesn't work that way. Valuations are outstanding right now. They will not stay this way and when they move, they often move in a big way and stay down for many years. That is why timing the market is such a dangerous game. A sale process takes about 7 months on average. If you are thinking that you might want to sell your business, it's a good idea to start the process soon in order to take advantage of the current valuations.

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At TKO Miller LLC, we are passionate about educating business owners on the process of selling their company in an open and transparent manner. If you are a business owner and you want to learn more about investment banking, transaction timing, selling your business or other frequently asked questions, please visit our Seller's Corner.


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