Your business has no doubt been under a lot of economic pressure over the last 15 months or so. That pressure may stem from too much or too little demand for your products or services. A lot of either type of pressure can make it very tempting to sell your business now, but selling your business under economic pressure is ill-advised unless you absolutely have no choice. Economic buoyancy provides the best return on the investment of your hard work, imagination, dedication, and, of course, capital.
Economic pressure is more than just the relative health of the economy, as other factors can squeeze profits. Many are experiencing a margin squeeze because of labor issues and supply chain issues even as the economy is growing. These are temporary, though very real, problems, and they are not a great basis for deciding to sell the business, as doing so could leave a lot of money on the table.
Economic buoyancy of your EBITDA provides for the best time to sell your business for maximum valuation. The difficulty is that many firms have a hard time judging what profits will look like two to five years out, and it is the anticipation of future profits, or the lack thereof, that should be a key determinant in the timing of the deal. There is no solid financial basis for selling your business with a multiple of 4.5 on an EBITDA of $2,000,000 ($9,000,000 selling price) when the economy will provide you with an opportunity to realize an EBITDA of $3,000,000 two years from now ($13,500,000 selling price).
Business owners can determine with high probability whether economic trends will allow for increased profits, as the graph below illustrates (this is an aggregate of companies' profits so as not to expose any single company’s data). The GDP forecast (dotted lines) is derived using ITR Economics' proven methodology, which results in an industry-leading accuracy rate. ITR's methodology includes, among other things, the use of essential, time-proven leading indicators of upcoming economic and market trends. GDP and specific related industries can be forecasted with accuracy, and that information will provide the basis for determining likely future EBITDA values and, by extension, the best timing for the sale of the business.
In addition to addressing the optimal time to pursue a sale, owners should also assess the different types of buyers that might be interested in their business, and the ranges of value offered by those buyers. For owners, layering together the considerations related to valuation, succession/exit horizon, liquidity needs, tax planning, and any qualitative objectives is a worthwhile process and may be undertaken with advisors like those you will find at ButcherJoseph & Co. With proposed legislative changes to capital gains tax rates, more owners are interested in learning if selling to their employees through an ESOP is a viable option, given the tax benefits associated with that type of buyer.
In the meantime , the surest way to proceed with determining where your company’s revenue and EBITDA will be years from now is through ITR Company Data Forecasting. You will have the answers you need to maximize price potential based on economic factors.
Alan Beaulieu
President