07 Mar Around the Web: A Week in Summary
A recent article from Small Business Trends entitled “41% of Entrepreneurs Will Leave Their Small Business Behind in 5 Years” summarizes a report by a global financial services firm that looks at business ownership and entrepreneurialism in modern America. The report found that almost 60% of wealthy investors would consider starting their own business while more than 40 percent of current business owners are planning to exit their business. Of the 41% of business owners who are planning to leave their business in the next 5 years, half of them plan to sell their business.
The report highlights how heirs in the family are often reluctant to take over the family business and that many business owners underestimate what they need to reach a successful sale. The report notes that 58% of business owners have never had their business appraised and 48% have no formal exit strategy. One of the main takeaways from this should be that small business owners need to prepare for selling their business and they should create an exit plan well in advance.
A recent article posted on the Axial Forum entitled “Will High Valuations Lead to an M&A Renaissance?” explores the idea that high valuations could lead to big changes and improvements in the theory and practice of making deals. PE firms are looking to avoid commoditization and are mainly using two kinds of acquisitions to drive their internal rate of return (IRR): one which boosts current performance and one where they reinvent the buyer’s business model.
An acquisition to boost current performance is where most add-on acquisitions will focus and this is a lower risk strategy. On the other hand, business model reinvention is much more challenging but will become more necessary as technology advances and becomes more important in every industry.
With the combination of high valuations and the increased pressure to grow businesses through acquisitions, deal makers may be forced to get better at the overall practice of M&A. The hope is that PE firms will have their people be more actively involved in the transaction integration process, seeing how everything aligns with the terms, culture and mission of a business which will lead to more successful acquisitions.
A recent article on the CBB Blog entitled “When is the Best Time to Sell?” explains the factors involved in determining the best time to sell a business, such as the financial condition of the company, valuation, growth cycle, profit history, and the current market. In general, the best time to sell is when earnings are solid and trending upwards, while also having a history of good performance which gives the buyer confidence in future earnings. Timing is everything though, and external factors such as the economy, industry trends, competition, investor confidence and more are always changing and can impact value.
Understanding the lifecycle of a business will help a business owner to see when the timing is right. The peak of a business is when it has passed its growth phase and is in its sustaining mode. Buyers pay the best prices when the business is still climbing and hasn’t quite reached the sustaining phase. Once the peak is reached, the business could start to decline and then the opportunity for a sale is missed. The best deals are made on the way up, so sellers need to be careful not to wait too long to sell.