Is 2014 a Good Year for You to Sell Your Business?

Small-business sale transactions increased by more than 40 percent in the third quarter of 2013 compared to the same quarter in 2012, according to the BizBuySell report, which also reported that the median sale price for a small business increased three percent over the same period. All these statistics suggest market conditions are favorable for owners of small to mid-sized companies who are considering a sale.

There are four factors that contribute to this premise:

1.  Baby boomers are retiring. Every day for the next 17 years, 10,000 boomers will turn 65, according to Pew Research. This is the magical age when many people decide to retire, or begin making plans to do so. According to a report by Robert Avery of Cornell University, the majority of the baby boomer generation’s wealth is in their 12 million privately-owned businesses, increasing the likelihood that more businesses will be on the market in the coming years.

I’m already seeing this play out. Most of the business owners I’m working with in 2014 are selling so they can retire. More frequently, we are encountering situations where there is no option for family succession in the business. The next generation either is not interested or does not have the skill set to step into the shoes of the current owner.

Mid-market companies can expand their geographic footprint or shore up their core competencies through acquisition of competitors or companion products/services providers. To your benefit: market watchers sense that with the number of current 65-year-olds heading to 70, a glut of businesses may be on the market by 2019 and could reduce valuations.

2.  Private equity groups are cash-filled. There is an estimated $400 billion in private equity funds currently chasing business owners. These funds invest capital on behalf of endowments, pension funds and high-net-worth individuals. Many are three years into their life cycle, which means they can only take their 2% management fee on capital actually invested in businesses. Needless to say, they are heavily incented to put cash to work in 2014.

3.  Strategic acquirers are also cash-filled. Operating companies that trimmed down during the Great Recession have largely emerged leaner, more profitable and flush with cash. To drive shareholder returns, they are expanding their existing businesses and actively looking for acquisitions that can immediately increase earnings and/or enable them to reach new markets.

4.  Interest rates are at risk of increasing. The current interest rate environment is driving up private company valuations, since the cost of borrowing money to fund an acquisition is historically low. Many business owners we speak with feel that the coming inevitable uptick in rates will have a “chilling effect” on valuations as borrowing costs increase and buyers reset their financial models.

5.  Regulation is expected to increase. While it’s usually not the top reason sellers are coming to market in 2014, the burden of increased government regulation usually plays a role in the decision to pursue a transaction. We hear that the costs of compliance and reporting are eating into margins and that owners are being forced to spend substantial time and resources on things other than making and selling their widgets.

6. The economy is coming back from the precipice. The International Monetary Fund is projecting 2.5+ percent GDP growth in 2014—with the second half stronger than the first. Further, unemployment figures are positive: the Federal Reserve recently lowered its 2014 U.S. unemployment forecast to under 6 percent.

Now, many of those owners who made it through the recession are standing up, shaking off the dust and seeing a return to profitability … but they’re not excited about going through it again in the next economic cycle. It behooves business owners who are ready to sell during a stronger economy because the business’ financials and metrics are typically better, investors are more willing to take risk, and prices tend to be higher.

Andy Stockett, Managing Director, FourBridges Capital. FourBridges Capital is an investment banking firm based in Chattanooga, Tenn. Learn more at www.fourbridgescapital.com.