By Jim Jackson
When is the best time to consider a sale? This is among the key topics prepared for NEFA’s national conference March 15-17 where the author of this blog, Jim Jackson, leader of The Alta Group’s M&A practice, is a panel presenter.
Since a company owner will not likely know in advance when the sale of his or her company may become necessary or beneficial, ensuring that the organization is properly prepared for a sale by implementing key processes now is something we recommend. Even if there is a decision not to sell in the immediate future, following Alta’s guidelines will help businesses to become more valuable in the marketplace irrespective of the sale decision.
The best time to consider a sale is when your company has demonstrated a prior history of stable and rational growth in originations and earnings and has a strong likelihood of continuing that growth into the near future. Buyers will generally pay a premium for companies that can provide a track record of proven success and are likely to continue to carry that success into the future. In addition, it is beneficial to have the laws of supply and demand operating in your favor by having a large number of potential acquirers and having very few quality sellers available for sale. This generally occurs when larger companies find it challenging to meet their growth objectives organically, and are likely to reach out to potential sellers who can provide them with a strong portfolio and a source of increased originations well into the future.
It is also important to note that higher sales multiples are generally realized when interest rates and delinquency levels are low as this condition will usually result in higher margins which will increase the value of both existing portfolios as well as new originations to a potential buyer. Conversely, when interest rates and delinquency levels are high, margins become compressed and demand for portfolios and companies will generally decline due to the fact that it becomes more difficult for a buyer to achieve their required risk-adjusted returns.
In smaller enterprises in which the owner or a select few senior managers are the primary drivers of performance, the company should plan to sell when key members of the management team are willing to commit to remain with the new business and actively participate in the growth of the company for a period of at least three to five years. Buyers will often insist that a portion of the sales price be subject to an earn-out clause in which a portion of the sales proceeds are dependent upon the seller achieving certain performance criteria after the sale. This process serves to ensure that the sellers are properly motivated to continue to grow and manage the business post acquisition, and also provides the buyer an opportunity to transition the value and the vendor / customer relationships over time through a well thought out succession plan.
There are also times that a seller should consider a sale even when the market conditions are not favorable. These would include situations where otherwise well run companies are unable to secure a low cost stable source of funds making them less likely to be able to effectively compete in the marketplace because they are unable to maintain an appropriate rate of return or ensure that they have a steady supply of capital. In addition, companies may lack the resources necessary to design and develop an efficient operating platform to facilitate transaction processing and servicing making them less competitive in their markets. In these instances, it likely makes sense to consider a sale to a larger organization that can provide these services and would benefit from the increased business opportunities that the seller could provide, resulting in a situation where both sides benefit from the acquisition.
Obviously, economic and market conditions are considered in the timing decision, and we expect those favorable conditions to continue in 2017. Valuations remained high last year given the favorable interest rate environment, strong demand for growth in the industry, and the limited number of quality independent equipment financing companies available for sale.
The next M&A blog to be published later this month will cover strategic actions that sellers can take to make themselves more attractive to buyers and position themselves for a successful closing.
The Alta Group’s M&A practice has assisted more than 200 organizations in M&A transactions over decades, also providing valuations and due diligence expertise. Last year the firm had an active role in four major domestic transactions within the equipment leasing and finance industry.
Email the author at firstname.lastname@example.org if you would like to request more information or schedule a consultation.