Selling a privately held company in an uncertain market

With the equity and debt markets in the United States under tremendous downward pressure, investors are understandably anxious about the value of their portfolios. The same is true of business owners, whose portfolios consist primarily of the companies they own. Just as individual investors with 401Ks count on cashing in their investments in equities to support their retirement, company owners base their retirement plans on the assumption that they will be able to divest their businesses when the time is right for them.

As the third quarter drew to a close the economy was showing signs of continued weakness, credit markets were tight and the stock market was entering one of its most volatile periods in history. With many economists predicting continued sluggishness in the coming year, many business owners are second-guessing their plans to sell their companies. In some cases, they are right to do so because some companies are now having difficulty growing, or worse, they are experiencing softness in revenues and/or increases in operating expenses. For many companies, however, the market is surprisingly strong.

The companies and investors that acquire privately held companies judge acquisition targets on their profitability and potential for growth. Regardless of the overarching mood of the market, there is always demand for strong companies – particularly those that show stability or even growth while the rest of the economy slows.

Owners who have been considering a sale in the near future should carefully assess their financial statements during difficult economic times. Companies whose earnings are reliable in the current climate will be particularly attractive to acquirers, in part because their resilience is apparent, and in part because the demand for acquisition targets is now focused on a smaller supply of companies that appear attractive.

For those owners whose companies are challenged by the current economic conditions, this may not be the ideal time to sell. Instead, consider using the next few years to strengthen operations. After all, the value of a company can be substantially improved with a few years of advance planning.

A focus on improving efficiency, cutting unnecessary costs, diversifying the customer base and crafting a management succession plan will serve such companies well and prepare them for success and growth when the economy picks up pace.

Now more than ever, acquirers are attracted to profitable companies with strong gross margins, loyal customers, tenured employees/management and attractive growth potential. Acquisition financing is more difficult to obtain than it was a year ago, but transactions are still getting done as lenders seek to finance deals that make sense.

The ideal time to sell is when the business is steady or growing, the employee base and/or management team is stable and (perhaps most importantly) when an owner is ready based on his or her personal and financial objectives.

Paul Keller is a Managing Partner at ASG Partners, a Merger &Acquisition advisory firm that has helped owners sell their companies in the Pacific Northwest since 1982. He can be reached at paul@asgpartners.com or 425-450-4800.