At HMT our Partners are often asked “when is the right time” to sell a business, and in general our stock response is that it is relatively easy to conclude when is the wrong time to sell, but one can only tell if the timing of an exit was “right” with the benefit of hindsight. Almost more than anything else vendors fear getting their timing wrong, being taken advantage of, and ending up with “sellers’ regret”.
It may be reassuring to know that hardly any of the many vendors we have advised have ever articulated anything other than relief and delight once the deal is done. Like many things in life, slightly sub-optimal timing is worse in the contemplation than in the reality. It is also worth reflecting that you must anticipate the “right time” at least 6-12 months in advance of your optimal exit date, since that is how long the process itself can take.
So. In the absence of a celestial signal, how are business owners supposed to decide when to plan an exit and when to “press the button” on a process?
Our first response to this would be that if you are “ever ready” to sell then you will be in a far better position to take immediate advantage of benign market conditions, changes to tax legislation, an unsolicited approach or (in a worst-case scenario), illness or other changes to personal circumstances.
There is a direct analogy here with estate agency; if your house is well maintained, well presented and immaculately tidy, you can put up a “For Sale” sign overnight. If it needs a new kitchen or bathroom, one of the bedrooms is painted black, the garden is a jungle and you need a thorough declutter before you move, then you have some serious work to do before you can expect to generate buyer interest at market value.
As a business owner, if you are disciplined about understanding your value drivers, have strong management information, have the substantive elements of a data room in place, understand what specific aspects of your business are going to be the focus of potential buyers, have thought about management succession and have managed your PR, then you are going to be able to go into a process very swiftly, allowing you to respond effectively and opportunistically to external changes which might indicate that for you it is the “right time” to sell.
If you are ready primed for a process, the decision-making criteria are then a combination of personal and market factors. If you are ready to retire, or to move on to new challenges, then now is probably the right time to sell, unless there are clear signals that now would be the wrong time.
What might those signals look like? A poor trading performance which cannot be clearly explained by timing differences, short term factors (like COVID-19) or changes in strategy; Client relationship issues, particularly with key clients; Strong evidence of dips in market multiples for comparable businesses, an oversupply of comparable businesses on the market, a short-term need for major capital investment, significant market uncertainty which will directly affect your business, a fall away in sales pipeline…… all of these might be reasons to pause and reflect.
And how might you identify the “right” time? A wave of transactions in your sector at high reported multiples, more than one unsolicited approach from a would-be buyer or investor, strong demand indicators for your business because of macro-economic or wider market factors, a particularly positive projected medium term growth curve (perhaps on the back of a new product or service launch), an “oven-ready” management team keen to participate in a private equity led acquisition. All of these might be reasons to jump into a process.
At the end of the day, the right time to sell is dependent on generating the right deal to take, and you don’t have to conclusively decide whether that is out there until the documents are laid out before you ready to sign. Starting the thought process is not a commitment to sell, it just gives you the best chance for no regrets.
For some vendors, based on these factors, 2021 will certainly be the right year to sell their business.
At HMT our Partners are often asked “when is the right time” to sell a business, and in general our stock response is that it is relatively easy to conclude when is the wrong time to sell, but one can only tell if the timing of an exit was “right” with the benefit of hindsight. Almost more than anything else vendors fear getting their timing wrong, being taken advantage of, and ending up with “sellers’ regret”.
It may be reassuring to know that hardly any of the many vendors we have advised have ever articulated anything other than relief and delight once the deal is done. Like many things in life, slightly sub-optimal timing is worse in the contemplation than in the reality. It is also worth reflecting that you must anticipate the “right time” at least 6-12 months in advance of your optimal exit date, since that is how long the process itself can take.
So. In the absence of a celestial signal, how are business owners supposed to decide when to plan an exit and when to “press the button” on a process?
Our first response to this would be that if you are “ever ready” to sell then you will be in a far better position to take immediate advantage of benign market conditions, changes to tax legislation, an unsolicited approach or (in a worst-case scenario), illness or other changes to personal circumstances.
There is a direct analogy here with estate agency; if your house is well maintained, well presented and immaculately tidy, you can put up a “For Sale” sign overnight. If it needs a new kitchen or bathroom, one of the bedrooms is painted black, the garden is a jungle and you need a thorough declutter before you move, then you have some serious work to do before you can expect to generate buyer interest at market value.
As a business owner, if you are disciplined about understanding your value drivers, have strong management information, have the substantive elements of a data room in place, understand what specific aspects of your business are going to be the focus of potential buyers, have thought about management succession and have managed your PR, then you are going to be able to go into a process very swiftly, allowing you to respond effectively and opportunistically to external changes which might indicate that for you it is the “right time” to sell.
If you are ready primed for a process, the decision-making criteria are then a combination of personal and market factors. If you are ready to retire, or to move on to new challenges, then now is probably the right time to sell, unless there are clear signals that now would be the wrong time.
What might those signals look like? A poor trading performance which cannot be clearly explained by timing differences, short term factors (like COVID-19) or changes in strategy; Client relationship issues, particularly with key clients; Strong evidence of dips in market multiples for comparable businesses, an oversupply of comparable businesses on the market, a short-term need for major capital investment, significant market uncertainty which will directly affect your business, a fall away in sales pipeline…… all of these might be reasons to pause and reflect.
And how might you identify the “right” time? A wave of transactions in your sector at high reported multiples, more than one unsolicited approach from a would-be buyer or investor, strong demand indicators for your business because of macro-economic or wider market factors, a particularly positive projected medium term growth curve (perhaps on the back of a new product or service launch), an “oven-ready” management team keen to participate in a private equity led acquisition. All of these might be reasons to jump into a process.
At the end of the day, the right time to sell is dependent on generating the right deal to take, and you don’t have to conclusively decide whether that is out there until the documents are laid out before you ready to sign. Starting the thought process is not a commitment to sell, it just gives you the best chance for no regrets.
For some vendors, based on these factors, 2021 will certainly be the right year to sell their business.
HMT Partner Wendy Hart recently hosted a webinar to reflect on how business value drivers might have changed in light of both COVID-19 and Brexit. Wendy was joined by David Wrench of YFM and together they considered the various elements of the value equation and how business leaders can focus on each in turn to optimise outcomes in a post-COVID investment environment.
Here are the main topics which were discussed and explored during the webinar.
What is undimmed is the focus of investors and acquirers on both scale and growth. This has been a feature of the market for some time and while there will be exceptions to every rule, businesses of scale are typically more resilient than their smaller competitors. Move the dial for a buyer, allow an investor to deploy a meaningful amount of capital and there tends to be fewer of them in any given market. They therefore benefit from scale not only through their profit number, but also through a higher multiple. By the same token, future growth “franks” a high multiple through the promise of higher EBITDA and will always be a requirement of private equity investors.
If these things are unchanged, what then is different in the wake of a year of lockdowns? One is that business resilience is under the microscope. COVID-19 was a “black swan event”, predictable but not predicted and it took all companies and their investors by surprise. Business risk isn’t now a compliance issue, but a strategic one to be unpicked and assessed at the highest levels in an organisation. What else have we not thought of? And what business characteristics will best guard against it? Where investors may have been phlegmatic about customer or sector concentration or sub-optimal working capital management; these things add unnecessary risk to a suddenly much riskier world.
So investors and acquirers are attaching value to characteristics which reduce risk and which are suited to a post-Covid environment. The use of technology tools to drive efficiency, increase supply chain and customer integration, accelerate growth and eliminate human failings has long been a trend in business value creation. The pandemic has accelerated and embedded that imperative. Those businesses which have hardly been touched by COVID-19 are those that are the most virtual, the most connected and the most self-served by their customers. While pure technology businesses have been in high demand over the last twelve months; this focus on technology enablement and systemisation holds true across all sectors and businesses, however old economy they might be.
What is the impact of the far-reaching societal and governmental changes that we have experienced over the last 12 months on business valuations? So much has changed that it is incumbent on every business leader to reflect on the impact of those changes for their organisation and to identify where the risks and opportunities lie. Not only has there been a reinvigorated focus on public health, on online learning, on the world of work and the impact on the office, on social care provision, on how we consume music and art and entertainment; but we know that travel will be changed, the retail and casual dining sector has transformed and that last mile logistics has become critical. At the same time, movements like “Black Lives Matter” and #metoo have changed perceptions and priorities. Environmental drivers and social impact have become investor and acquirer considerations. All of these things have changed, perhaps subtly, the interpretation and calculation of business value and businesses that intend to transact now or in the future cannot afford to ignore them, as John Donne almost said, “No business is an island”……
The impact of COVID-19 Government support on the “debt free/cash free” equation, the impact of stretched and decelerated supply chains and reduced freight capacity on working capital cycles and completion mechanisms and the importance of setting and meeting realistic budgets are fundamental areas of consideration.
This is a subject that will continue to evolve as investors and acquirers continue to place their bets in a post Covid-19 environment. At the beginning of the webinar Wendy quoted Babe Ruth; “Yesterday’s home runs don’t win today’s games”.
The world has changed, business value drivers are evolving, business leaders and their advisers need to reflect and respond.
HMT Partner Wendy Hart recently hosted a webinar to reflect on how business value drivers might have changed in light of both COVID-19 and Brexit. Wendy was joined by David Wrench of YFM and together they considered the various elements of the value equation and how business leaders can focus on each in turn to optimise outcomes in a post-COVID investment environment.
Here are the main topics which were discussed and explored during the webinar.
What is undimmed is the focus of investors and acquirers on both scale and growth. This has been a feature of the market for some time and while there will be exceptions to every rule, businesses of scale are typically more resilient than their smaller competitors. Move the dial for a buyer, allow an investor to deploy a meaningful amount of capital and there tends to be fewer of them in any given market. They therefore benefit from scale not only through their profit number, but also through a higher multiple. By the same token, future growth “franks” a high multiple through the promise of higher EBITDA and will always be a requirement of private equity investors.
If these things are unchanged, what then is different in the wake of a year of lockdowns? One is that business resilience is under the microscope. COVID-19 was a “black swan event”, predictable but not predicted and it took all companies and their investors by surprise. Business risk isn’t now a compliance issue, but a strategic one to be unpicked and assessed at the highest levels in an organisation. What else have we not thought of? And what business characteristics will best guard against it? Where investors may have been phlegmatic about customer or sector concentration or sub-optimal working capital management; these things add unnecessary risk to a suddenly much riskier world.
So investors and acquirers are attaching value to characteristics which reduce risk and which are suited to a post-Covid environment. The use of technology tools to drive efficiency, increase supply chain and customer integration, accelerate growth and eliminate human failings has long been a trend in business value creation. The pandemic has accelerated and embedded that imperative. Those businesses which have hardly been touched by COVID-19 are those that are the most virtual, the most connected and the most self-served by their customers. While pure technology businesses have been in high demand over the last twelve months; this focus on technology enablement and systemisation holds true across all sectors and businesses, however old economy they might be.
What is the impact of the far-reaching societal and governmental changes that we have experienced over the last 12 months on business valuations? So much has changed that it is incumbent on every business leader to reflect on the impact of those changes for their organisation and to identify where the risks and opportunities lie. Not only has there been a reinvigorated focus on public health, on online learning, on the world of work and the impact on the office, on social care provision, on how we consume music and art and entertainment; but we know that travel will be changed, the retail and casual dining sector has transformed and that last mile logistics has become critical. At the same time, movements like “Black Lives Matter” and #metoo have changed perceptions and priorities. Environmental drivers and social impact have become investor and acquirer considerations. All of these things have changed, perhaps subtly, the interpretation and calculation of business value and businesses that intend to transact now or in the future cannot afford to ignore them, as John Donne almost said, “No business is an island”……
The impact of COVID-19 Government support on the “debt free/cash free” equation, the impact of stretched and decelerated supply chains and reduced freight capacity on working capital cycles and completion mechanisms and the importance of setting and meeting realistic budgets are fundamental areas of consideration.
This is a subject that will continue to evolve as investors and acquirers continue to place their bets in a post Covid-19 environment. At the beginning of the webinar Wendy quoted Babe Ruth; “Yesterday’s home runs don’t win today’s games”.
The world has changed, business value drivers are evolving, business leaders and their advisers need to reflect and respond.
