Selling A Business During An Economic Downturn
Assuming that selling a business for its optimum value is the goal
, there are three important factors that affect a business owner's ability to maximise shareholder return:* The performance of the business
* External factors including the state of the industry and economy
* The owner's personal motivation
Unfortunately, it may be difficult to get all three factors aligned at the same time. While caution is warranted, there are many reasons why selling a company can still be a very viable and potentially lucrative exit option during a time of economic decline.
1. Business performance
Business divestiture is always easier when the business is either in growth and/or delivering stable financial performance. Acquirers generally want to invest in a business that will provide them with a good return on their investment, and they are willing to pay more for a company that has a positive trend and outlook. If a potential acquirer feels their strategic direction, capital or resources will be the catalyst for future growth, they are likely to pay less for that business than for an enterprise that is supporting its own development.
2. External factors
The climate in which a business operates will also affect a business' valuation and how marketable it is. An overall economic downturn can result in the reduction of corporate budgets and consequently in acquisition activity. In the same manner, a decline within a specific industry or geographic region can also prompt a reduced appetite for private company acquisitions in those areas as potential acquirers focus on their core businesses.
However, though the economic slowdown seen in recent months has produced a notable decline in acquisition activity, the number of businesses being sold continues to remain well above historical norms, indicating that there are still many buyers looking for viable targets. That said, at Beanstalk Management we are seeing potential acquirers set the bar higher, and their purchase criteria more often than not include healthy and profitable target companies. As our recent sale of Iceni Technology shows though, good businesses are still selling.
3. Personal motivation
Personal motivation is frequently the most influential factor when it comes to selling a business. Retirement, family pressures, illness, shareholder dissension, burn out, difficult trading conditions or simply time for a change often drive the divestiture agenda. Although some of these events may be anticipated, business owners can be caught out by the unexpected.
So the fact that either the economy or your industry is exhibiting a downturn should not be the only consideration in your decision to sell or hold on to a business. If a company is doing well and demonstrating growth, and personal motivation is influencing a decision to sell, it may still be a lucrative option to divest now. It is also worth noting that holding on to your business may also pose a risk as the future is unpredictable and there is never a guarantee that bad times will not get worse.
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