Is now the right time or should you wait?
private equity investment
Generally speaking, it is often difficult for business owners to come to terms with selling a business, even more so if selling is during an economic downturn, when valuations may be lower than they were a year or a few months ago.
As such, the initial reaction may be for sellers to pull back however, today’s buyers have indicated a genuine willingness to factor in and nullify what is clearly an extraordinary time in our country. This means buyers should logically agree to prove an adjustment or “addback” to an owner’s earnings for the impact of the crisis, as long as that impact can be quantified.
Further, investment from private equity has been somewhat subdued for several years due to inflating valuations and strategic buyers’ willingness to pay larger premiums due to having immediate synergies (cost and revenue) they can count on. This creates a welcome environment for buyers who have been waiting for the moment when they can be competitive.
THE IMPACT OF A CRISIS
In times of crisis, there is a tendency for business owners to lengthen their timeline aspirations for selling their businesses, especially if they do not have “built-in” succession (family, internal management, people with the means to pull off an acquisition, etc.).
This is true of many baby boomer-owned businesses, many of whom may be experiencing operational or revenue-related shock associated with the COVID-19 pandemic. Some fear that selling now might lower the value of the company while other boomers, who experienced the wrath of 2008’s recession, could decide “enough is enough” and deem today as the right time for an exit.
In all, there is likely to be a fairly significant pullback in terms of actual new deals until there is more certainty in the market, but I don’t suspect it will be long lived, given the nature of this particular crisis and our economy’s standing beforehand.
GOOD NEWS FOR BUSINESS OWNERS
The likely outcome, even in the midst of COVID-19 challenges, is that an abundance of opportunities for private equity will develop, with the impact of not only advancing the economic recovery, but also providing liquidity to business owners in need or desire of a transition or sale.
Private equity demonstrated similar behavior coming out of the 2008 financial crisis: while many strategic buyers “pulled back,” private equity did the opposite and plowed significant capital into the markets to facilitate transactions. This is good news for business owners who want to test the selling waters.
Roebling Capital Partners make controlling equity investments in lower-middle-market companies who wish to expand grow or sell their businesses.
ABOUT THE AUTHOR
Keith Carlson is co-founder and Managing Partner at Roebling Capital Partners, a lower-middle-market private equity investment firm.