Since the onset of what has been termed the Global Financial Crisis – in typical Western shorthand, the GFC – in late 2008, the market for business exits has undergone a radical transformation. Unable – or at best, unwilling – to forecast with any confidence, buyers of businesses have found it nigh on impossible to secure finance for acquisitions, have seen their own enterprises re-valued and have significantly less appetite for risk. For would-be sellers, the boom time hangover is really only now fading and grudging acceptance is being given to this new reality.
That’s not to say that business sellers are rushing to sell, not by a long shot. With superannuation funds compromised by post-GFC sharemarket returns (or lack thereof), so many entrepreneurs are instead hanging on, boosting their retirement funding with earnings as best they can before finally pulling the trigger. Opportunities abound, but sellers are far more circumspect about the timing, faintly hoping that a return to the 2006-07 heyday is just around the economic corner.
But is it?
The reality is that we’re probably facing a prolonged period of uncertainty. I’m no economist, but if one considers the systemic issues in Europe and the USA, the possibility of an apparently overheated Chinese economy cooling off and the en masse retirement of the Baby Boomer generation over the next decade, all signs point to a prolonged “Buyer’s Market”. It would be of little surprise if what we are experiencing now is, for the foreseeable future, the New Normal.
So how do potential business sellers look at exiting during the “New Normal”? What little gems of wisdom can be imparted to offer a glimmer of hope that the big money is still there waiting for them when the time comes?
Well, for starters, by considering very carefully what exactly the business has to offer to an external party, seeking an above average return on investment. Is an acquisition a safer bet than an organic expansion? Are there direct competitors that in reality would be a better bet as acquisition targets? What do they have that nobody else does, a valuable competitive advantage that is transferable to another party?
Consider that the supply of business for sale opportunities as the Boomers sell out will most likely far outweigh demand. Any first-year economics student will tell you that prices inevitably drop in such a situation of demand/supply imbalance. So another consideration is an ultra-conservative price expectation. Leave it to your broker or corporate advisor to push for the highest possible price, but set a practical low end of the range. For those that don’t, disappointment may await.
If there are insufficient numbers of buyers looming, it is my expectation that management buyouts (MBOs) and employee buyouts (EBOs) will be de rigeur for a significant proportion of business exits in the coming decade. With less external financial available, bear in mind that it takes years to set up and execute such a strategy, but with enough foresight, planning and employee engagement, it could be the answer for so many SMEs.
Still, MBOs aren’t generally executed at a premium price, as the buyers in this case aren’t well-funded and the business effectively funds the buyout. I remember early in my career a sales training session, in which the trainer suggested that “if you want to make money, deal with people who have money”. It is a little pearl that has never been forgotten, and in the context of the market for M&A it is highly applicable. Those that have money and are very willing to invest it are the big end of town: major corporates, private equity firms, multi-nationals seeking a slice of our nice little Australian pie. To appeal to this Ultimate Buyer set, a business has to have scale, cash flow and expansion potential, so as suggested in last month’s blog Why it might pay to become a buyer, swallowing up or partnering with a few industry mates to create an organisation that would be on the big ticket radar has some merit.
There is plenty that a little exit planning could do to make life in the New Normal less frightening for the would-be retiree, but for those unwilling to invest a little hard work, perhaps the best tip would be to remain in fantasy land, relying on creating the next Google, Facebook, Groupon or or other over-valued Internet sensation in your spare time, floating it for billions and retiring to your own private island. Greece, perhaps?