Special thanks to Jeff Ostenso, CEO of Ironmark, Mac Tisdale, President of the Mid-Atlantic Region for First National Bank, and Don Charlton, a Partner with Argosy Private Equity for their strategic input on this article.
For any business owner, there will eventually come a time when you begin to think about selling your company. The question that often keeps business owners up at night is, “When is the right time to sell?”
Given the uncertainty and volatility of the current market, you might assume that now is not a good time to sell a business. However, that is not necessarily the case.
To understand whether the timing is right to sell your business, it is worth putting aside the daily headlines and focusing instead on the health of your own business, the state of the capital markets, and what a buyer will look for when evaluating your company.
There is Still Capital to Fund Deals
According to PwC’s 2022 mid-year report, U.S. private equity (PE) firms have nearly $1 trillion in dry powder to deploy—and that number rises to over $3 trillion on a global basis according to Bain & Company. Those figures may be down from 2021, but they indicate that the private equity market remains in strong position to fund quality deals.
As it relates to debt financing, banks are still lending money at interest rates that are historically low even after the most recent increases, and many analysts expect rates to begin stabilizing soon. Although bank lending is seeing some tightening, many lenders are still willing to finance acquisitions at attractive terms.
As Mac Tisdale, President of the Mid-Atlantic Region for First National Bank, recently shared, “There remains a great deal of liquidity in the market. Multiples remain high, and even though interest rates have risen, we are still seeing good deals get the financing they need.”
Don Charlton, a Partner with Argosy Private Equity, concurred. “There is a lot of dry powder available and good quality deals will get a great deal of interest from investors,” he said. “And even though the credit market is tightening, banks are still willing to underwrite deals.”
Quality Companies Remain in Demand
With the capital markets still in a positive position, PE firms remain in search of quality companies that provide a good opportunity to earn a strong return on investment (ROI).
“There is no shortage of deals to look at and consider; the key for us is to do the right deals,” said Jeff Ostenso, CEO of Ironmark, one of the largest and most forward-thinking print and communications companies in the Mid-Atlantic. “As long as we believe they further our strategy of building out our digital and data analytics capabilities, and they can be acquired at reasonable valuations that make them accretive, we are going to continue to be aggressive in our M&A efforts.”
What constitutes a quality company in a buyer’s eyes?
In any market, acquirers tend to focus on four key criteria.
- Quality Revenue Streams
The most attractive target businesses have strong revenue streams, typically in the form of recurring or reoccurring revenue. Recurring revenue, often measured as a monthly recurring revenue (MRR), is common in SaaS companies and others that sell services on a monthly or annual subscription basis. Reoccurring revenue comes from repeat customers that buy from you on a consistent periodic basis, though they are not contractually obligated. The more reliable your revenue stream, the more attractive your business will be to an acquirer.
- Strong Management Team
PE groups often buy a target company with the idea that it would make a good platform to bolt other businesses onto. As Charlton noted, “Much of what we do here at Argosy is buy and build. Almost every deal we make has a platform and then subsequent add-ons, which can be transformative from a value creation standpoint.”
In those cases, buyers look for a management team with the skills and capabilities to continue running the business effectively today and growing it aggressively for a higher ROI tomorrow. The more capable your leadership team, the more likely a buyer will be willing to invest in you and your business.
- Solid Fundamentals
While acquirers understand they are buying the future when they agree to purchase your company, they still pay close attention to your most recent past performance. As Shakespeare eloquently put it, “What’s past is prologue.” Typically, a PE firm will base your business valuation on your trailing 12 months of cash flow. The stronger that figure, the more attractive your business.
However, other factors come into play when assessing your fundamentals. If the company continued to thrive throughout the pandemic, it shows the business is battle-tested. If you have solid key performance indicators (KPIs) that are easily tracked, a buyer will have greater confidence in your projections. Also, if you have a deep, diverse customer base, an acquirer will see that you have lower revenue risk than a business whose revenue is highly concentrated within one or two customers.
- Stable or Growing Industry
While the macroenvironment of the economy can play a major role in your business’s success, the microenvironment of your industry is just as important to a buyer.
Some industries can thrive in the most difficult economic conditions because they are considered mission critical. For instance, companies that sell products or services driven by safety, legal, or regulatory requirements have less revenue risk than those that sell discretionary products. In the government contracting sector, businesses in defense, intelligence, and cybersecurity are booming because they provide essential services to government agencies.
Other industries are benefitting from significant tailwinds, including the Infrastructure Investment and Jobs Act (which is proving a boon to engineering and construction companies) and the Inflation Reduction Act (which will infuse significant capital into clean energy companies).
Headwinds Still Exist
We would be remiss if we did not acknowledge the headwinds that even the healthiest businesses in the most stable industries face today. High inflation, a recession threat, supply chain constraints, and the conflict in Ukraine create very real challenges.
A strong labor market is another major headwind in many industries, making it difficult to attract and retain the talent to fulfill existing contracts, let alone grow the business. In particular, companies that rely on highly skilled workers like engineers and IT specialists and those whose work is labor-intensive have struggled to stay fully staffed to meet customer demand. Many have had to temper their growth projections, which weighs on their valuations.
Given these headwinds, acquirers will be more selective in choosing target companies, as Charlton pointed out.
“At Argosy we have historically been very disciplined in our investment approach, and with raw material costs on the rise, wages rising and fuel costs higher than normal, investors need to fully understand their costs,” he said. “Sellers may have to be prepared for more scrutiny during the sales and diligence process.”
What does this all mean for you as a business owner who may be thinking about selling your company?
Despite these uncertain times, PE firms have the capital to acquire well-run companies that can generate a strong ROI whether as a platform acquisition or bolt-ons to an existing holding. They continue to seek quality companies with strong fundamentals, reliable revenue streams, and qualified leadership teams, especially in industries that are mission critical or benefitting from tailwinds. For businesses that check off all or most of the boxes on a PE group’s checklist and are well-prepared for due diligence, it could very well be the right time to sell.
If you are trying to decide whether now is a good time to sell your business, contact the investment banking experts at Chesapeake Corporate Advisors to schedule an introductory call.