I frequently encounter small business owners who tell me that they plan ontheir business when the “time is right.” When I ask them when that will be, they invariably indicate that the right time to enter the process will be at the peak of the next M&A cycle. When asked about how they will know when the peak has arrived, I usually get blank stares or they say they will hear about it in the media or better yet, from their Uncle Larry, the part-time business broker-pool man.
The fact is no one can accurately predict the peak of the next M&A cycle. We are really good at predicting two things: when the cycle has turned up (which it did starting mid-2010) and when we are past the peak and the market is declining (hopefully that won’t be for awhile). History tells us that the optimal time to find a premium buyer for your business is at the beginning of the M&A recovery cycle. That is typically when buyers are most active and good deals are relatively scarce, which can contribute to favorable valuations.
The Issue of Time
The significant amount of time it takes to actually close a deal is the real problem in accurately timing the market so you can sell at the peak. A few weeks ago, we analyzed the most recent Pepperdine Private Capital Markets Project survey results. As you’ll recall, we looked at the positive mindset of one player in the capital markets equation: the private business owner. At the time I mentioned that Pepperdine also surveys other key players in the capital markets field, including investment bankers and related intermediaries. One of the questions Pepperdine asked this segment was how long does it typically take to close a transaction on average. The results may surprise you.
As you can see, nearly 70% of the deals closed by intermediaries take between seven to 24 months to complete. And most likely this time frame does not include the time it takes to evaluate the company, recast the financials, and develop a five-year pro forma. Since that typically adds an additional 30 to 90 days, I would estimate the total time it takes to close a deal including the initial evaluation to be 10 to 27 months.
You can see the trouble with timing the peak of the M&A cycle. Even if you established a relationship with an M&A advisory firm today, you probably would not be closing a deal until May of next year at the earliest. If you are certain that May of 2012 will be the next peak, you better get moving on yourplanning process.
The Time is Right
Most middle-market business owners I meet have no idea how long it takes to close a deal with an optimal buyer. Can it close faster than 10 to 27 months? Sure it can. But most often – unless you have a highlybusiness in a very attractive industry – if you close fast, you will probably be leaving chips on the table. And any “deal-maker” or M&A professional that guarantees you that he can close a deal for your company in six months or less (including the time it takes to get your financials in order via a full-blown evaluation) should be viewed skeptically.
The reality is this: If you want to sell when the time is right (i.e., when market conditions are prime) you need to enter the market as soon as possible. As Pricewaterhouse Coopers LLC put it, “We are in the midst of a sustained M&A cycle.” Since these cycles typically tend to last two to three years, the next 24 months could provide you with the best opportunity at finding an optimal buyer in years. And since it takes 10 to 27 months to close most deals, your timing is perfect to start the process soon.
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