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How to Sell Your Business Quickly and Avoid Common Pitfalls
Discover how M&A advisors can help sell your business smoothly and securely. Axial’s Advisor Finder matches you with top experts for a successful sale.
Advisors, Business Owners, Private Equity
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January and February 2016 brought the lowest middle market M&A deal volume for that time period in 25 years. Many point to the growing gap between seller and buyer valuation expectations as one of the biggest drivers of the downturn.
We asked a few Axial members to weigh in on what’s causing the valuation gap, predictions for the future, and how sellers and buyers can bridge the gap to get deals done.
Brent Beshore, Founder &Â CEO of adventur.es:
Expectations drive valuation and so I look for where there are consistent gaps in expectations. High-growth companies (20%+) and technology-based firms are always tricky. The future looks so bright that it’s almost always hard to live up to those expectations.
Oil and gas has been interesting. Sellers are arguing that low oil prices are temporary, but no one knows. Betting on the future of any commodity is a gamble.
Lastly, I’d say there’s been very high expectations set with “down-the-middle” deals, meaning companies that are well-managed, with leadership in place, solid customer base, and a good track record. The competition for those has really driven up prices over the past 4-5 years to what I’d consider an unsustainable level.
Eric Mattson, Principal at Excellere Partners:
Historically speaking, M&A value gaps are generally a result of specific market changes (such as a sharp increase in interest rates or a drop in the stock market) that impact buyers faster than sellers’ expectations adjust.
It’s a little different in this market, as there really hasn’t been that shockwave event; rather, it seems that the strong valuations have simply caused sellers’ expectations to accelerate faster than most buyers’ pricing thresholds.
Clearly, the energy services industry has gone through a severe market change that resulted in a short term valuation gap; but now most energy services sellers have pretty much adjusted their expectations down. Elsewhere, I’m not sure that we’re so much seeing a valuation “gap” as we are seeing continued high-multiple transactions. It’s simple Econ 101 – there’s a lot of demand (capital) chasing a limited supply of quality opportunities.
Where I think there is a gap is with lower quality deals. These folks see high multiples and want the same result, but their businesses just don’t warrant a premium valuation. This is where it’s so important for advisors to help sellers understand appropriate expectations.
John Slater, Partner &Â Capital Financing Team Leader, FOCUS Investment Banking:Â
For the past several years private equity has enjoyed a strong ride, buoyed by low interest rates and ready availability of credit. Since the collapse of the high yield market last year, financial buyers have found themselves less able to justify the ultra-high valuations of the past few years, but sellers’ expectations remain fixed in the stratosphere. This conundrum is not new; it happens at some point in a typical M&A cycle.
Brent Beshore:
It’s narrowing a little, but not much. There’s so much money flowing into the LMM that from a supply-demand perspective, it’s hard to see them moving too much until there’s a downturn and people get scared. I never like to bid against people who see very little risk and that’s what has been happening more-and-more for the last couple years.
Eric Mattson:
Absent an unexpected market trigger event, we don’t see much of a change in the near term. Also, we don’t expect too much economic drama until post-election.
Brent Beshore:
Focus on risk-mitigation. If the seller wants more upside, then economically it makes sense for the buyer to have their downside capped. We’ve done this through more earn-out structures (prove it), or through preferred returns if the company were to take a dip.
Eric Mattson:
As a private equity buyer, we’re doing everything we can to get to be creative and to demonstrate how we can be a value added partner.  We also have the ability to make quick decisions and close rapidly, which is appealing for sellers who want to avoid deal fatigue.  But to be honest, in this market there’s no silver bullet for buyers.  Sellers, on the other hand, can do things to bridge the gap. For example, certain advisors are having their seller client produce a quality of earnings report, which is a third-party revenue model and income validation..  We’re also seeing seller presentations with up to 10 years of historical financials, which shows how the business performed through the last business cycle.   Â
John Slater:
FOCUS has always addressed the problem with a unique approach. Our business concentrates 85% on strategic buyers whether we are representing private company sellers or corporate acquirers. Strategic buyers look at valuation from a different lens, which enables them to take into account more than just pure numbers. They can move the needle for the acquired company by eliminating duplicate functions, creating strategic synergies in sales, production and distribution and by taking advantage of unique technologies, brands and skill sets in the acquired entity. In our experience this frequently enables the strategic buyer to offer a better overall deal for the seller and a win for the buyer as well.