When to sell? This year, next year, sometime….. never?
16th October 2020
In some sectors, serious buyer interest has already returned despite rapidly changing COVID-19 restrictions, and the continuing trading uncertainties relating to BREXIT – indeed current exchange rates are encouraging European, US and far eastern acquirers to transact now.
Likely changes to the tax treatment of capital gains in the looming Budget have focused many owners minds on the personal cost of increased rates on consideration received at the point of sale – particularly those who have large cash resources.
Can and should you sell a loss-maker?
Extenuating circumstances aside, it would seem best to defer a sale until reasonable profits are being generated. However, it may be best for owners to sell to a party with greater financial resources and marketing clout and enable owners to share in their ability to generate far greater growth from that product or service. This is particularly true in this current post COVID climate where people may soon be burning cash fast and hard…if they aren’t already!
The transaction should provide for considerable enhancement of the initial deal-value if significant growth can be achieved. The initial deal-value recognises the current business value and should include an element of expectation or synergy to the buyer. However, contrary to the thoughts of some owner-managers of loss-making businesses, their companies cannot be valued by removing the brackets from, or changing the colour of, the bottom line figure… and then multiplying by conventional earnings multiples!
A similar approach is being adopted with COVID-19 affected businesses whereby sensible acquirers recognise that vendors are not going to sell at a depressed price just because the world stopped for a year. They are generally looking at structuring transactions that allow vendors to extract full value for the business today with deferred elements reflecting the likely recovery of the business beginning anywhere from 2021 to 2023. Given the financial stresses on many privately owned businesses over the last 9 months, partnering with a strongly funded player who is able to maximise the trading opportunities in the upturn is for many an attractive option.
If you are profitable and benefitting from the current situation?
Owner-managers are often tempted to delay selling their companies “for just another year so that the fabulous Project X can come in”. Well not only does Murphy’s Law often ensure that projects are delayed but the rate of profit growth enjoyed, rarely matches expectations and it is the consistency of profit growth rates that affects multiples applied to profits in assessing value.
Buyers require upside in any business they acquire. For most profitable businesses, the ideal time to sell is before it has reached the peak of its profit cycle. Once profits have plateaued, the multiple applied by buyers will be considerably lower, and if profits are declining…let’s just say it makes our job considerably harder!
At this time if a third party can provide financial security for both yourself and your business while adding to growth prospects, a sale in certain sectors is absolutely a realistic option regardless of current levels of profitability and uncertainty.