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Is the Window of Opportunity for Selling a Business Closing?

Today"s economic environment offers a very favorable market for business owners interested in selling their companies. But because the economy runs in cycles, the key factors creating this seller"s market: low interest rates, availability of credit, abundant private equity funding and a strong economy, won"t last forever.

If two or three of these economic factors move against you, it will make it more difficult to sell your company. If all four are not in your favor, it will be even tougher if you want to sell your business. Considering retiring anytime in the next several years? Be aware that the economy moves in cycles that last for years.

Now is the time to consider these economic variables, as well as your personal and business circumstances, to help determine whether you should be thinking about selling your company.

Rising interest rates decrease buying power
The interest rate environment is in flux. In the summer of 2005, the rate for 10-year treasuries, a good indication of interest rates in general, was below 4%. Since then, it has gone as high as 5.25%, but recently (as of Sept. 5, 2006), rates have dipped as low as 4.8%. No one can say where rates will head.

However, rising interest rates make it harder for potential buyers to finance the purchase of a business. Thus, they might have to pay less for the business to make a deal work for them. If rates continue to go up, it might have a dampening effect on the market for-and value of-your business.

Credit availability moves in cycles
Over the last few years, financing has been relatively abundant by historical standards. But credit availability, like most economic factors, moves in cycles. When credit becomes more difficult to obtain, buyers will have a more difficult time financing transactions. Not only will this lower the multiples some are able to offer, it will also reduce the number of buyers in the market, reducing competition for business and lowering prices.

Private equity firms have abundant cash to invest
Private equity firms are driven by the internal rate of return on their investment, part of which depends on interest rates and the availability of credit. If less credit is available, private investors must put up more of their own money to acquire a company, motivating them to pay less for a business in order to increase their rate of return.

The good news for business owners: There is now more money than ever in the private equity world. The pressure on private equity firms to get money out the door and into good investments has created strong competition and caused private equity firms to go "downstream" and look at smaller businesses.

For example, private equity firms that in the past would invest only in companies with at least $5 million in EBITDA (earnings before interest, taxes, depreciation and amortization) are now seriously considering businesses with $1 million or less in EBITDA. Some large private equity firms have even set up groups to go after smaller businesses.

This is good news for business owners: but how long this abundance of private equity funding will last is anyone's guess. Eventually, the market will return to a more normal state, resulting in less competition for your business.

The economy continues to be strong
The U. S. economy has been good for a long time. When it eventually turns down, there will be fewer buyers for your business. A slowing economy will also tend to decrease the value of your business as sales decline.

What are your circumstances?
Should you be thinking about selling your business? The answer lies in seeing your personal circumstances in light of these economic factors. If the market dries up, can you afford to wait for the next boom cycle? If you're young, healthy and have a profitable business, perhaps you can afford to wait.

But if you are thinking of retiring in the next five to 10 years, you should think about selling your business now, even if you're not quite ready,because you can't afford to wait for the next uptick in the mergers and acquisitions market. Conditions as favorable as today's for selling your business might not reappear for another 10 years.

Questions about opportunities for selling your business? Contact Patrick F. McNally, Partner in Charge of Corporate Finance Consulting, Blackman Kallick at 312-980-2934 or pmcnally@BlackmanKallick.com.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.