It May Be Harder to Sell My Business - The Decline of the Bull Market

By Darren Cherry

Over the past several years, the business sell-side environment has been favorable to sellers. Price multiples reached record highs across various industries. The environment may be dramatically different for owners planning to sell over the next few years. The price multiple will likely be squeezed due to more available transactions, inflation, and higher interest rates. Let’s examine a few ways to overcome the market challenges.

How Buyers will be impacted

We anticipate an unprecedented increase in the number of businesses listed for sale over the next few years due to the COVID-related stress and the aging of the Baby Boomer population. The increase in supply will lead to a more selective process by potential buyers.

Many business leaders have limited recent experience navigating a prolonged inflationary environment. While many have responded with widely accepted price increases, a prolonged climate will likely be met with greater resistance and substitution. For buyers, this represents a higher risk level around margin assumptions.

Perhaps the most significant impact is the rising interest rate levels. Given the historically low-interest rates, buyers could easily be looking at an increase of over 50% in the cost of debt. Many buyers will be looking to maintain returns (ROI) on the investments, thus reducing the prices they are willing to pay.

What Changes Should Sellers Expect

Sellers should expect more thorough due diligence as potential buyers try to mitigate potential margin compression risk. For the first time in many years, sellers will start to see declining prices multiple in business valuations as comparable decline. These two factors will undoubtedly lead to an increase in earn-outs to reconcile the potential gaps.

Buyers and sellers have often used an earn-out to resolve differences in the business purchase price. In this case, the Seller would receive a higher payment if certain conditions were achieved. Most would say that earn-outs have historically favored the buyer. To the extent that the risk of inflation and rising interest continue, sellers may want to exercise significant caution in the deal’s structure.

Strategies to Mitigate Risk

While the environment is worsening, below are a few ways you can start today to counter the market effects.

✅Build a lower multiple (say 0.5x) into your strategic model and target an increase in EBITDA to offset.

✅Assess your current business risk and aggressively implement de-risking strategies.

✅Include upgrades to your intangibles such as customer relationships, employee accountability, systems, and processes into your strategy.

✅Flush out growth plans, especially those that you may not be able to implement, as it will showcase growth opportunities.

✅Take action to make your due diligence information more robust.

Conclusion

The future for private company owners planning to sell their business will look different in the next few years. The sell-side environment will shift more to the buyer’s advantage as valuations, and related price multiples decline.

The action you take today around preparing your business to be more attractive and transferrable will place your company in the A-grade investment status for future buyers. The earlier you start, the more value you can create.

Don’t let the marketplace ruin your future payday. Please send me a message to start your journey today and avoid tomorrow’s disappointment.