Know When to Hold 'em, Know When to Fold 'em
By Russ Warren and Tom Zucker, EdgePoint Capital Advisors
Success at the poker table depends on understanding the relative strength of the cards you hold and acting smartly - knowing when to walk away a winner. As Kenny Rogers' song says, know when to hold 'em, know when to fold 'em.
Deciding when to sell a business depends on the same reasoning: facing what noted business author Jim Collins calls, 'the brutal facts of where you're at.'
A severe business downturn like we have just experienced re-orders the competitive playing field. The weakest middle-market players are killed off, others are marginalized, and some emerge as stronger, more robust competitors. Business pundits agree that many market sectors have fundamentally changed, and the current climate is not simply part of a regular business cycle. Consultant Tom Monohan, CEO of The Corporate Executive Board points out that customer needs change after a recession, and many companies never return to their former profitability.
The KEY QUESTION to ask when considering the sale of a business today is, "Is my business going to be worth more - or less - tomorrow?" It is also helpful to ponder, "What investment of time, talent and money would it take to make it worth more?" Am I willing to make that investment? Or, should I sell soon? Know when to hold 'em, know when to fold 'em.
If you were thinking about selling your business before this downturn, how comfortable are you to hang on until things return to 'normal'? Ask yourself, "As the global economy resets to an uncertain 'new normal', what lurks in the shadows for my business?"
- Changing customer requirements?
- Consumers re-orient from 'spend on luxury' to 'buy value and add to savings'
- OEMs - autos, durables, health, IT, logistics - re-vamp platform offerings
- Supply chain value propositions change - further winnowing and off-shoring
- Mega mergers (set to re-ignite) disrupt long-time supplier relationships
- Service expectations increase, willingness to pay decreases
- Less favorable employee expectations, mobility and productivity?
- The most productive employees are most demanding and mobile in a recovery
- Government climate favors union activism - throughout manufacturing, services
- More non-recoverable costs?
- Unfunded mandates from key customers (free engineering, design, inventory)
- Cap and Trade energy requirements
- Stretched out payment terms
- Limited ability to raise prices
- Availability of needed credit and capital?
- Additional Government regulation?
- Reduced sale proceeds due to higher long-term capital gains tax rates after 2010*
- Today's 15% will definitely be raised - to 20%, 25%, 30%, 35%?
- Probably for transactions closed after December 31, 2010
- Each 10% bump in the rate requires 13% to 15% more EBITDA to stay even
Add these uncertainties to the reasons a sale was of interest before the tsunami hit, and the best time to explore a full or partial sale of your business may be sooner than later.
The typical sale of a middle market business - to an unrelated party, ESOP or management - requires six to twelve months (often depending on factors beyond the seller team's control) from the time a financial advisor like EdgePoint is engaged.
To a buyer, a business is clearly more valuable when profits are rebounding (like now for many businesses), than if the loss of a major customer or other material adverse change were looming.
So, you might consider taking some chips off the table now to hedge against future uncertainties. It is feasible to sell part or all of a business at a fair price in today's market. There is demand for mid-size businesses that have come through the recession and are recovering ground, especially if they performed better than their industry in the downturn. And, because many owners are not yet ready to sell, there is not yet enough supply to fill that demand. Buyers are making allowances for recent profit performance if current monthly improvement can be documented.
We will be glad to discuss your situation in complete privacy, and help you assess when is the best time to begin the process, given your company's recent performance and outlook. Call Russ Warren: (216) 408-7901 or Tom Zucker: (440) 724-5406.
*See the article "Window of Opportunity - Paying Uncle Sam Less When You Sell Your Business" by Warren and Zucker.