10 Reasons why Spring 2011 could be a great time to sell your company.
Spring is in the air, the sun is shining and for the first time in nearly three years, we have a really positive story to tell about the business environment and the opportunity for business owners to sell their company. We have always preferred to tell you our real opinion, rather than tell you what you want to hear. As a result, this is the first time since early 2008 that we’ve come to you with an optimistic outlook.
We have always preferred to tell you our real opinion, rather than tell you what you want to hear. As a result, this is the first time since early 2008 that we've come to you with an optimistic outlook.
In this article, we have put together a top 10 list of reasons why this could be a great time to sell your business - this includes market data from:
•Reuters
•Federal Reserve
•PwC
•tax information
•buyer information
•as well as our insights from the M&A deals that we are working on at ClearRidge.
When a business owner asks about a “good time” to sell, they are typically looking for an expert’s opinion on business valuation, demand, timing and deal structure. To identify a “good time” for a client’s particular company, you need to consider the performance of the M&A market in general, their particular industry, their unique business and its existing situation, as well as the future outlook and opportunities. An owner will also have their own particular motivation for selling their business, but we are going to talk today about the bigger picture of the M&A market in the US and how it impacts our home market: midsized companies with $20 million to $200 million in revenues in Oklahoma and the surrounding Midwest region
These days, if we sell a midsized company in the Midwest, we consider prospective buyers from as far away as North America, Europe, South America, Asia and the Middle East as it tends to be more important to consider a prospective buyer’s strategic fit to your business rather than their location. As a result, we have to keep up with M&A Activity across the US and beyond, which leads us to the following data and research.
We just received preliminary results from Thomson Reuter’s M&A activity survey for the first quarter of 2011. M&A Activity is having a breakout first quarter, which is in stark contrast to the doldrums of the last two years. This is great news for business sellers and there is more good news to come.
Here is a list of 10 reasons why Spring 2011 could be a great time to sell a company.
1. Thomson Reuters released preliminary Q1 2011 M&A data this week showing $717 billion in M&A activity through March 24th, a 58% increase over the same period in 2008 and only 25% off the same period in 2007, which was a record breaking year. According to Reuters, January 2011 was the busiest in the last 11 years. This should create significant momentum to get more buyers off the sidelines.
2. According to another study from Thomson Reuters and Freeman Consulting Services, this positive trend should continue, with predictions that global M&A activity will surge 36% in 2011 over 2010, to over $3 trillion.
3. According to the Federal Reserve, Corporate America is sitting on $1.9 trillion of cash. After hitting new highs in five of the last six quarters, nonfinancial corporations’ cash and other liquid assets reached $1.9 trillion at the end of 2010. That’s 7% of all their assets, the highest level since 1963. Now, you shouldn’t make a direct comparison to 1963, because there are much higher levels of debt on corporate balance sheets, but there are certainly piles of cash that US companies are going to be looking to spend.
4. In the final quarter of 2010, capital spending among US companies amounted to only $975 billion, or 6.6% of gross domestic product — up from a low of 5.4% in 2009, but still well below the 10-year average of about 8%. If that 6.6% spending level were to approach 8% again, we would likely be seeing further increases in M&A volumes. Across the board, if organic growth is more challenging, then managers and owners seeking growth in revenue and earnings per share are more likely to focus attention on adding new business units or customers via an acquisition.
5. PwC's recently released annual CEO confidence survey showed that optimism among CEOs had returned to almost the same level as before the financial crisis, with 48 percent of those questioned very confident about 2011 revenue growth.
6. Foreign investment in US companies is increasingly commonplace and demand is picking up.
7. Strategic buyers are not only competing with industry companies, but also with well-funded investment firms, some of which have anonymously backed other strategic acquirers in their industry, and therefore share many characteristics with a strategic acquirer.
8. The mood of confidence is higher than it has been for quite some time, as measured by the number of inquiries we have been receiving to reports from Wall Street.
10. All of this data points to one thing. In the simplest terms, all else being equal, more M&A activity leads to higher demand for niche businesses, which leads to higher transaction prices and better terms for the owners of midsize private companies.
How long is this trend going to continue? We don’t know the answer to that, but we do know that there hasn’t been a better time since 2008.
When it comes to the valuation and timing to maximize sale price for a specific company, there are unique business characteristics, historical performance and future prospects of a business owner’s company within the context of the market conditions of their particular industry. In some cases, you will see pockets of high activity in specific industries, where strong demand, a positive outlook or significant M&A deals, can trigger a domino effect of increased M&A activity and a short-term peak in demand to acquire companies in that particular industry.
And while the decision to sell a company is driven by many factors other than market demand and price, it makes it an easier decision when the market is moving in your favor and you can be more confident that you’ll be selling in a market with higher demand and higher prices.
We will be back in a couple of weeks with our insights on M&A data relevant to particular industries that we have worked in, as well as the latest M&A outlook for each. In the meantime, if you would like to talk to us about a thorough review and appraisal of your industry niche and your specific company, as well as comparable transaction data from the last twelve months, we would welcome the opportunity to help you.
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