For many business owners, the question of when the best time is to sell your business comes up often. “My answer is while the business environment (company performance, outlook, buyer’s appetite and availability of funding) is critical, other factors will come into consideration when business owners are considering their options,” said Corporate Finance Partner, Mazars, John Bowe.
“When discussing business sales with founders, we will often reverse the question and ask owners what they are looking for in a sale process and what are their motivations for considering a sale at this time.”
“Some of the answers to this question are “I have had an approach, and they seem a good fit”, or “I have a personal reason (Retirement, no succession plan, health reasons, need the business to take the next step which requires investment)” or “I want to de-risk my personal balance sheet as all my eggs are tied up in one basket”. All the above need to be taken into consideration, while also assessing the current environment, when deciding if now is the right time to run a sale process.”
In terms of the environment, right now, there has never been as much funding available in the Irish market for transactions said Bowe. Banks are lending, alternative debt options are available, and both domestic and international private equity are active in the market.
Interest rates are extremely low, so corporates with excess cash are earning zero (or worse) on deposits, so it’s either hand the cash back to shareholders or use it for growth through acquisition. This creates a competitive environment for transactions which is good for sellers.
Brexit, with all its negative uncertainty for Irish exports and wider concerns of a longer UK slowdown (which will impact Ireland), has one clear positive, Ireland will be the only English-speaking country in the EU. Ireland has been and will remain a hub for foreign direct investment due to uncertainty around the UK’s access to the European market.
“Another trend we have seen in the last 24 months is UK private equity being more active in the Irish market,” said Bowe. “I feel some of this is Brexit related as UK funds need to invest funds raised (use it or lose it) and with uncertainty in their own domestic UK market Ireland is in focus. International Private Equity completing Irish investments in the last 12 months include ECI investment in KB associates, HG Capital investment in Brightpay and SIG investment in Phorest and Poppulo. Domestic PE funds have also been active, MML investment in RelateCare and Eastland Engineering, Carlyle Cardinal Ireland investment in City Bin Company, BGF in Winterbrook.”
While all these businesses serve a different need for their end customers, a common characteristic is the recurring revenues they generate. Sustainable recurring revenue businesses are attracting higher multiples in today's market. “How long this will last is unknown, and the failed IPO of WeWork and subsequent takeover by SoftBank highlights expected valuations do correct themselves dramatically once business fundamentals don’t stack up,” said Bowe
“One other thing to keep in mind is it takes time to sell a business,” he said. “A typical process takes 6 to 9 months, but for planning purposes, you should plan on a year. If the economy slows down while your business is on the market, it’s going to affect your sale price.”
Investors and buyers don’t just look at historical figures said Bowe. “They will look at how the business is doing now and the future growth potential. If your revenues and profitability start to slow, a buyer may pull out of a deal or offer a lower price. During an economic slowdown, market multiples will go down, and the number of investors/buyers active in the market will also decrease.”
“Overall, I feel the current period is not a wrong time if you want to run a competitive process, given the level of debt funding options, the number of private equity players and the health of corporate trade balance sheets,” said Bowe. “The current environment is supportive and offers an excellent opportunity to sell but as a business owner understanding your motivations for sale are essential. I’m a big believer of “you can only sell your business once” and running a competitive process will ultimately get you the best price.”
This article first appeared in the Sunday Business Post 24th November 2019.