Both the economy and policy makers are giving mixed signals about what the next year or so will look like for manufacturers. Business owners who have been considering selling their business within the next 18 – 24 months are facing uncertainty about whether they should put their business up for sale now or wait for things to improve. Here are some factors that might impact your decision to sell and your ability to get top price for your company.
The cost of money.
The Federal Reserve just approved its third consecutive interest rate rise of 0.75 percentage point and signaled that additional large increases were likely as they try to manage inflation. The Fed has set their benchmark federal-funds rate to a range between 3% and 3.25%, a level last seen in early 2008.
Rising interest rates don’t have much impact on the ability of private equity firms and other strategic buyers with deep pockets to close a deal. But they may affect the ability of an individual buyer to get a deal done at all, and do change the offer price from most buyers facing higher interest rates.. Higher interest rates make debt service more expensive, which will cut into the profitability a new owner can expect to see. If your company’s margins are already narrow, some buyers might view the deal as riskier and therefore less attractive. So your pool of potential buyers may be smaller until borrowers see more favorable rates.
The potential for recession.
Technically, by definition, we may already be in a recession since the economy has been shrinking for two consecutive quarters. But consumers are still spending, although they feel more cautious. This is certainly not the deep recession of 2008 – 2009, when almost every industry took a significant hit and lending came to a screeching halt.
Of course, not every business is affected by a recession in the same way. If your business is recession-resistant, or even counter-cyclical, you may actually grow sales during tough economic times. But again, the threat of an economic slowdown will almost certainly make buyers more cautious and slower to commit to purchasing a company.
What’s interesting about recessions is that there’s almost always a lot of opportunity when we emerge and growth picks up. Competitors may have failed or become open to acquisition. There will be pent-up customer demand. Recessions tend to spur new technology and innovation, so you might have the opportunity to improve your processes or invest in new equipment.
The question for you is: will you have the time, energy, and resources to take advantage of those opportunities? Or should you sell now and give a new owner the chance to invest and grow?
Your personal timeline.
We say it all the time: the decision of whether and when to sell is a very personal one. There’s no way to predict what the market for your business will look like a couple of years from now. You’ll need to make your decision to retire or move on based on what matters to you and what feels like the right time for you and your family.
Keep in mind that your business might not look the same in 18 months. If the economy does slow down considerably, your sales might be flat or in decline. Your margin may not be large enough to sustain the debt service an individual buyer may be incurring. Even after a recession ends, you’ll need to have several quarters of documented recovery and growing sales before you can attract serious buyers, so you may be staying in your business longer than you planned just to get back to your current level of profitability.
Is the window closing? Not necessarily. We’re still seeing interest from buyers and deals getting done. If you were planning on staying in your business another five years or so, you can ride out this uncertainty and wait for better economic indicators.
We can only see the optimal time to sell in the rear-view mirror; no one can predict it in advance.
But if your selling timeline is within a couple of years, an experienced Business Broker or M&A Advisor can help you optimize your business’s value and find buyers who have the resources and motivation to make decisions, even in these uncertain times.
