LuM&A - The Art of Bright M&A | Part 1 - Optimal Time to Sell
LUM&A IS A FORTNIGHTLY SERIES WHERE WE SHARE OUR EXPERIENCES OF THE KEY ISSUES OWNERS FACE WHEN CONSIDERING SELLING THEIR BUSINESSES.
IN PART 3, WE ANALYSE THE VALUATION CONCEPT BASED ON "PROFORMA ADJUSTED EARNINGS"
IN PART 4, WE IDENTIFY THE KEY ISSUES THAT DETERMINE VALUATION MULTIPLES
PART I: WHY AND WHEN SHOULD I CONSIDER SELLING MY BUSINESS?
From the owner's perspective
Having built and operated a successful business is an accomplishment in itself; ultimately however, for most owners, your business will constitute the greatest part of your wealth, leaving you with most of your eggs in one basket. Diversifying your asset base and de-risking your future earnings quickly become a priority, especially in the absence of an adequate successor.
Selling your business will allow you to:
Ensure the continuity of the business in the longer term for the benefit of your employees and the legacy you have created
Monetize a significant portion of the value you have created whilst at the same time securing an income stream
Reinvest the proceeds in more suited risk profile to your future objectives
From a business perspective
Becoming part of a larger group or strategic partner allows the business to compete at the next level and realize it's full potential through:
Access to funding capabilities that will allow the firm to achieve its expansion strategy
Access to a wider pool of human capital capabilities and resources to expand the business
Enhancing the business market power through size in a supplier/client denominated business
Providing growth opportunities for your employees both technical and social
When is the best time to sell your business?
All businesses follow a similar life cycle albeit at a different speed, which is specific to their industry. For example, a retail and hospitality business with low barriers to entry has a much shorter lifespan than an industrial or manufacturing business with a niche specialism.
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The optimal time to sell your business is before it has reached its full potential. Unfortunately, most owners consider selling their businesses after the business is past its peak and is either flat, or requires a significant capital injection to take it to the next level.
It might seem counter intuitive and difficult for owners to come to this conclusion when they haven't seen profits maximized; however, from a buyer's perspective a higher multiple is often offered when growth hasn't started decelerating yet and the need for a new investment cycle is not yet in sight.
This is often the reason for the "valuation gap" between buyer and sellers illustrated above in our chart.
More significantly, from our experience, a larger pool of buyer exists for growth businesses, and in most instances, there may not be a buyer pool at all for a business that is flat to declining or that is at a stage of a new investment cycle to reinvigorate growth.
Lumina adds value to owners seeking to grow or exit their business by providing external guidance on decisions that matter.To find out more about Lumina’s Transaction Advisory services offering, click here.
By Jessica Estefane, CFA
Director | Lumina Advisers
Jessica has been working with the firm for the last 3 years playing an integral role in closing a number of deals in the Education, Healthcare and Food and Beverage sectors, before joining full-time in October 2016. Jessica continues to play a vital role on all key mandates in the Transaction Advisory and Funding Solutions divisions.
Jessica is an experienced transaction advisory professional with 10 years of experience in the UAE. A former sell side Equity Research analyst with SHUAA Capital, Jessica ranked among the top analysts in the Middle East region for equity research in the telecommunication, energy and utilities sectors for four consecutive years by Euromoney Middle East until 2012.