Selling Your Company in the Future? Move Quickly.1 May, 2012 By: George Spilka, Spilka & Associates imageSource
Though this article is delivered in 2012, there are many reasons why middle market owners thinking of selling their companies over the next decade, should consider consummating a sale not later than 2014. Although most points discussed in this article pertain with equal relevance to all companies regardless of size, this information is primarily directed at middle market companies - firms with transaction values between $5 and $250 million.
As a financial advisor, I am more optimistic about the prospects for the short and intermediate-term (the next 2-3 years) acquisition market than I was last year. 2012 should be the best time to sell a company because of the likelihood that market conditions will be strong. They will probably continue that way through 2013 and quite possibly 2014. However, after that, the market is on course to become problematic. I am much more negative about the long-term than I was last year. I expect a severe downturn to occur that can have a devastating impact on the U.S., and probably the global, acquisition and financial markets sometime before the end of the decade. Its impact may be triggered by either a major event or a confluence of events. The economic conditions it creates are likely to remain for an extended period of time. My feeling is, it’s best to be well-prepared.
The major reason why these significant negative events always occur so unexpectedly is because it is in none of the major financial firm’s self-interest to forecast catastrophic economic or financial market conditions that are on the horizon. It would severely impact their business. And as we all know, the major financial firms think first and foremost of their self-interest.
Why Consider Selling Promptly?
The following are certain reasons why you should consummate a sale by not later than 2014, and preferably by the end of 2013:
- Acquisition pricing is very strong now. I believe it will remain that way through the end of 2013.
- It is likely there will be a second Obama Administration. To start significantly reducing the deficit, it will require more than reductions in spending, as there are not enough spending cuts to make without harming the very structure and fabric of the U.S. Correspondingly, it will necessitate an increase in taxes. These revenue raising measures will primarily be focused on increasing the taxes on the wealthy, possibly significantly. One of the taxes almost certain to be increased is the capital gains tax. I expect it to be increased to at least 20%, if not 25%. If it is increased to 25%, your net after-tax sale proceeds have just been reduced by 10%. This is a sizeable hit.
- Numerous private equity (PE) acquirers have a pressing need to invest capital promptly. Many of these funds received money from their investors in 2008 before the market crashed. That money basically sat idle for 2½ years. The PE firms are now under tremendous pressure from their investors to get that money invested. This is driving these firms to invest that money quickly. For certain good companies, firms are willing to overpay if they have to rather than risk losing the deal. This has produced some attractive selling opportunities.
- U.S. corporations are flush with cash and have extremely strong balance sheets. This makes strategic acquirers very aggressive in the acquisition market and willing to pay strong multiples.
- The stock market performance during the first 2 months of 2012 has been extremely good. This has been a contributing factor to an increasing level of optimism and buoyancy in the business community.
- The interest rates are low and should remain low through the foreseeable future. I don’t anticipate the Federal Reserve deviating from its stated policy of keeping interest rates low until 2014. The majority of the Fed Governors don’t feel it is worth the risk to implement a restrictive monetary policy, as they believe that the premature implementation of a restrictive monetary policy was a major factor causing the depth and length of the Great Depression.
Facing a Precarious Scenario
The following are, in my opinion, certain reasons why the U.S. is likely to be faced with a very precarious or even catastrophic financial scenario by the end of the decade. This scenario could be longer than any we have endured in our lifetime. Many indicators suggest this.
- Although the European economy and financial mess has not been in the news as much during the past few weeks, the problem is far from receding. The European Union (EU) is basically dysfunctional in this situation due to its structure. There are too many countries that have to make decisions that then must be sold to their own disparate domestic constituencies. This negates the dramatic action necessary to begin extracting many of these countries, such as, Greece, Spain and Portugal from their disastrous situations. Furthermore, it appears the EU is trying to defer the problem basically hoping it will go away or they will discover a painless solution to it. However, that is not going to happen. The European banks are also in a much weakened condition. This will impact the world economy,as these banks have financial relationships with the world’s major financial institutions.
- The combination of problems the U. S. faces including its huge budget deficit, the economic stimulus still required to get the economy back in a self-sustaining mode, the disparity of income between the “haves” and “have-nots” and the gridlock between the warring political parties creates a situation that becomes an almost intractable problem. The U.S. must find a way to bring its deficit under control over the next 3 years without doing anything precipitous that would push the economy back into a recession. This will be very difficult with our dysfunctional political system that is gridlocked. If these problems are not solved promptly, the country’s economy and financial markets will be in very precarious shape.
- The emerging markets have driven the world’s economy for more than a decade. However, current problems and others on the horizon will diminish the positive impact of the emerging markets on the global economy. The growth in China has slowed. In addition, the four major banks are all state-owned.They have been propping-up many failing state-owned companies. In turn, these banks have been supported by the national government. Therefore, the Chinese financial system is not as healthy as it appears to be. The slowdown in China’s growth will have a substantial negative effect on all countries, but especially the resource exporting ones. Brazil will be one of the most affected, as China is its major trading partner. This coupled with Brazil’s uncompetitive and dying industrial sector could cause a major slowdown in Brazil. India is now facing its highest unemployment rate since 1983, its lowest growth rate in two years, with an ineffective government incapable of solving the country’s fundamental problems. Overall, the emerging markets are not going to be the world’s growth engine they used to be. This could have a major impact on the developed world’s economies.
- There are numerous geopolitical hot spots. The major ones are in the Middle East, including Iran with its threat of nuclear weapons. This is exacerbated by the potential of an armed conflict between Israel and Iran. There is also the nuclear threat in North Korea that now has a 27 year old, possibly unstable leader leading its charge for nuclear weapons. Though I dislike being the “bearer of bad news,” as you look at the many significant things facing the world, it is very unlikely that enough of these problems can be avoided to avert not having a problematic, albeit negative impact on many aspects of the acquisition and financial markets.
Expert Advice During High-Risk Periods
Consider retaining an investment banking firm with unique specialized acquisition knowledge that can position your company and guide the time of sale. It is essential that you do not miss the “window of opportunity” that you have to realize a premium price during the next two or possibly three years. Research and/or consider this window to indicate if there is a substantial long-term or long-lasting risk that the company’s value could be significantly reduced due to events beyond the seller’s control. Ultimately, the decision is yours.
It takes an extremely perceptive and sophisticated executive to understand the incredible level of risk lurking over the global economy and correspondingly their company’s value for the remainder of the decade. If these risks come to fruition, it could have a dramatic effect on the economy and financial markets. The best time to cash-out if you expect to sell your company in the next ten years is, in my opinion, by no later than 2014; even considering the end of 2013.