3 external factors that influence business value

For more on maximizing business value, watch Michael Querard’s webinar on-demand.

If you’d like to learn more about which potential buyers are likely to pay a premium for your company and which ones will threaten your legacy, we invite you to register for two upcoming Vistage Deal Network webinars.

Protecting Your Legacy: Buyers to Avoid When Selling Your Business
Thursday, May 23
10:30 a.m. PT

and

Finding the Right Buyer for Your Business – It May Not Be Who You Think
Thursday, June 20
10:30 a.m. to 11:30 a.m. PT

When thinking about finally exiting their business, owners often ignore external factors that have a potentially huge impact on the price they can receive. Keeping in mind the fundamental truth that a company’s value will be determined by buyers in the marketplace, savvy entrepreneurs who properly time their exit greatly enhance their chances of obtaining maximum business value.

While the basic supply / demand relationship drives the overall direction of pricing in the mergers & acquisitions (“M&A”) market, there are other individual factors that owners should monitor so that they can make good and informed decisions about exit timing.

The most important factors for owners to watch currently are:

1. Interest rates
Interest rates have a direct, inverse and frequently disproportionate impact on the value of a privately held company. In other words, when interest rates go down, the value of a company goes up. When interest rates go up, the value of a privately held business goes down. It is not just the cost of funds that drives this relationship, but the opportunity cost that investors assess when determining which companies to purchase and at what price. The Federal Reserve has recently announced that it is postponing any further interest rate increases until 2020, at the earliest, giving business owners a window within which to sell their businesses at a significantly higher value.

2. Certain demographic trends
The demographic group that has impacted the US economy most for the past 70 years are Baby Boomers. Research shows that people at or approaching retirement age own companies worth trillions of dollars. If just 50% of these businesses hit the market over the next few years, the massive additional supply threatens to lower pricing in the general M&A market for an extended period.

3. The economy
Add to this increased supply those business owners that believe the US economy will decline in the next couple of years and therefore want to sell their businesses too, and the likely result is a long period of lower prices for middle-market businesses. Timing is critical.

Generate a higher price with a limited auction

Once a business owner is aware of the external factors influencing value, the owner can act at the opportune time. Then the focus shifts to taking the right action. For the well-informed owner, properly exposing the business to multiple, diverse buyers simultaneously is the right action. This is the limited auction. Creating and running a limited auction process can be a time-consuming task, one that results in three distinct advantages for the business owner.

Clearly, the competition created in a limited auction generates higher prices for the asset being sold. Exposing the business to diverse buyers who value the business differently encourages competition that usually results in a much higher price being paid for that business. The limited auction structure also gives the business owner an opportunity to assess buyers at the same time as buyers are assessing the business.

Conducting due diligence on buyers while they are competing for the business allows the entrepreneur to select the right buyer. That may be the buyer offering a deal structure resulting in higher net proceeds to the business owner. The right buyer might be one that the owner believes will do the best job of maintaining and enhancing the owner’s legacy. It may even be a buyer that wants to inject additional resources into the business and partner with current ownership to take the business to the next level and beyond.

Finally, the presence of other buyers in the limited auction structure gives the business owner leverage to move their preferred buyer smoothly and quickly through the due diligence process.

Correct timing. Correct process. Correct buyers. These are the factors that maximize business value.

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