Insights: Article

Is it time to join the sell party?

By Amber Ferrie

March 14, 2018

As a business, you have a life cycle. This cycle includes fun steps such as startup, growth and maturity, as well as a few growing pains like decline and rebirth/innovation/closure. One of the ways to continue this cycle is through merger or acquisition, as this allows you to pursue new growth or get a fresh start with new ownership.

Now you may be thinking, my organization is far too small for M&A (merger and acquisition) activity. We understand where you're coming from. After all, business media often reports on large size M&A deals and transactions, supported, brokered and executed by investment banks. The names of the organizations involved sound familiar as they often appear on a little list known as the Fortune 500.

Well we’re here to tell you that M&A is a viable tool for growth in smaller sized businesses. You are welcome.

The Lowdown on M&A
The reasons for deciding to sell in any merger or acquisition is similar, regardless of size, geography or industry of a business. In other words, all of these things are like the other.

Here’s a few common reasons why firms consider M&A:

  1. The owner(s) would like to say ‘hey hey hey, goodbye’ and exit the business by passing on the operational responsibility to family, the management team or an outside buyer.
  2. Desire to combine with a strategic competitor or similar company to gain market share or to create synergies and increased profits. Keep your friend close …
  3. A need for additional capital to continue growing, innovating and expanding.

Why Sell Small?

First, a few definitions. Middle-market companies are typically defined as firms with $50 million to $1 billion in revenues. Lower middle market firms are defined by $5 million to $50 million in revenue.

As you can see, the reasons for M&A activity can be applied to any size company. Now, more than ever, owners and managers of lower-middle and middle market should consider the benefits of using the M&A space as a means of building wealth. After all, it’s trendy.

What do we mean by trendy? Well, professionals at the Faegre Baker Daniels 2015 M&A Conference described the M&A space as “frothy” and “hot” (no, they weren’t describing their Starbucks choice), followed by the same individuals projecting that “hotter” and “pricey-er” would be adjectives to define the space through 2016.

This is occurring because of a few things:

  • Record-high multiples and all-time high selling prices which are being driven, in part, by unused capital. This capital is used for investment by Private Equity Groups. In other words, the money’s burning a hole in their pockets.
  • Strategic buyers looking for strong add-on businesses.
  • Shortage of high-quality sellers. We know there are solid companies operating in the lower middle market without an exit plan. Those without an exit plan are either hoping to live forever or are fine with the company dying when they do. Even those that are contemplating a potential sale are often unsure of how to go about it. We understand selling your business can be a daunting task filled with change, emotion and uncertainty.
  • The increasing EBITDA margins of smaller companies. Largely through the use of technology, smaller companies have been able to post high margins. This allows companies with lower revenues to still attract private equity attention.

The moral of the story ... it's becoming an increasingly lucrative time to sell. But wait, there’s more. Because this is such a fun party to be at, family offices have also entered the market as interested buyers. This competition forces buyers to be prepared, expediting the transaction process and generating higher sale prices. Think about it like this … you’re the guest of honor at a party, where everyone else has arrived to see you and you alone.

Are You Ready to Sell Your Business?
This party is happening, regardless the size or industry of your organization. Rather buyers are looking for management who know what they’re doing and defendable growth projections. You can easily have these, regardless of your size. There is no formula or magic metric that can define the ‘perfect’ time to begin the process of looking for a buyer for your business. Hey, we’re not going to give you all the answers.

Rather, you have to look at your own long-term business and personal financial goals. This will be your trigger to join the M&A party. But we will caution you with this. The transaction process is more than just a snap of your fingers. It’s complex and time-consuming. So make sure you bring a guest to your party … a trusted business advisor you will advocate for your best interests.

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