Figuring out the right time to sell a business is tricky under the best of circumstances.
But when market volatility has the owners of advisory practices feeling like they’re riding the Tilt-A-Wheel at a summer fair, the additional layer of uncertainty can introduce timing jitters.
The best firms don’t have to worry, said Onofrio Cirianni, a business succession consultant at New York-headquartered EisnerAmper, during a webinar about advisor exit strategies yesterday.
“The best businesses are selling in good markets and in bad markets,” he said. “But those B+ or B- companies, the multiples are going down and the structures of the deals are changing.”
Based on recent analyses, he said, the consensus is that the U.S. is leaning into the uncertainty of a recession, and this would indicate that prime selling time has come to an end.
Historically, a true seller’s market lasts for only about five years out of a 10-year cycle, with sales including more concessions to the buyer as the market heads into a recession, Cirianni said. Once in a recession, it’s definitely a buyer’s market, and so sellers may want to sit out until prime selling time comes back around about three years later.
That’s not wasted time, he assured, as it is the optimal time to enhance the value of the business. Once an owner is ready to sell again, it still takes a year to get through the process, with one month needed to analyze the viability for the sale, two months to prepare a teaser page and informational memorandum, three months to evaluate offers and letters of intent, four months to conduct due diligence on the buyer, and two more months negotiating final agreements.
“Typically, it is over a 12-month period, and it relies on having the right planning team and deal team in place so that every stage of that sales process is met,” Cirianni said, adding that Interest rates, economic disruption, war and politics, do have an impact on active deals, but not a big impact. A shortage of talent has a much bigger impact on a business, he said.
“When market conditions change as we’ve seen over the last 12 months, one of the shifts we’re seeing is the structures of the deals. Maybe less cash, maybe you’re getting more equity. Where maybe owners were walking away from the business after a transaction, they’re asked to stay longer,” he said. “Maybe there’s an earnout, which historically has always been the case—over 80% of transactions ask owners to stay on board longer.”
Coming out of one of the best prime selling times of all time, the current sales environment might seem like a bit of a letdown. But the ultimate goal for most business owners is to grow a business and increase its value, and then impeccably prepare it for sale, which is hard to do and even harder to time against market conditions.
One option, which a firm’s next generation of advisors might prefer, is to look at an internal sale, which could not compete with outside buyers a couple of years ago but now deserves a look, said Hal Michaels, an EisnerAmper partner.
Valuation is a key element of the buy-sell agreement, he said, and it’s important to remember valuation is fluid. Once the seller’s market has cooled, the better deal, in a sense, may be selling internally.
Owners who have spent a lot of time with their key employees and are interested in having some legacy in the firm aren’t necessarily interested in wringing every dollar they can out of the business, Michaels said. They may be more interested in protecting the reputation and growth of the firm, even as they move on to a new phase in life.
“In that situation, the buy-sell agreement may provide for discounted values, maybe based on book value, and may provide favorable terms to the employees,” he said. “And it may provide bank loans that the business guarantees. But what is really driving that mentality is legacy, as opposed to optimization of value.”