In an effort to explain why now (2019) is a great time to sell here is a basic understanding of the financial buyers, also known as private equity groups, their funding, and their motivation.
Private equity groups (PEG) are numerous and represent another asset class investment option, which is owning private operating established businesses. Their sources of funds include endowments, pension funds, wealthy investors, corporate funds, and their own funds. This asset class provides a semi-liquid investment that has frequently outperformed many other options such a publicly traded securities, public and corporate debt, and real estate. There is, of course, risk when investing in operating businesses and consequently the acquisition price is relative to this risk.
Private equity groups raise their money by obtaining commitments to invest when an acceptable acquisition is identified. These commitment sources often pay an annual fee to cover PEG’s overhead, a transaction fee to the PEG at the time of each acquisition, and a percentage of the ultimate resale profit once their equity investment receives a preferential return. So, the annual overhead fee paid focuses the equity sources to encourage their private equity group to actually invest their committed capital, in order to recover these fees plus have an opportunity to receive an attractive investment return. However, during the recent recession there were fewer acceptable businesses available as selling a business when its financial trends are down is not prudent and also potential buyers were understandably cautious from the economic conditions. So, overhead fees were paid by their capital commitment sources, yet investments were scarce and their overall investment returns were often less than expected.
Now that private corporate earnings are trending upward, a focus on selling a business is certainly more prudent. Particularly so, when well-funded buyers are numerous, the interest rates for acquisition debt is historically very low, and the recent economic improvement makes the business’ future appear brighter. In conclusion, “If your business is performing well financially, has upward increases in revenue and cash flow, and is making at least $2 million in pretax this is a great time to consider selling” says consultant Emmett Barnes, President of The Montana Group (www.montanagroup.com).
