Last month in BIC, my partner John Zapalac wrote a column about preparing your business to be sold. Many businesses we work with are not only profitable but are experiencing robust profits. So why sell at all if your business is doing so well? Here are some reasons business owners consider when contemplating a sale/recapitalization.
Timing the market
In the past two years or so, the M&A landscape has shifted strongly toward the seller. One reason is the financial and banking issues of a few years back have ebbed and banks are lending a bit more freely. More importantly, much of the investment community is what I refer to as “industry agnostic,” meaning many investors don’t care (to a certain degree) where their money is being invested as long as the investment receives an acceptable return at an acceptable risk level.
The banking crisis caused private equity groups (PEGs) and companies that might otherwise grow through acquisition to sit idle. Generally, companies in the energy sector have done well the past few years and have cash on hand, and now banks are able to help them supplement that cash on hand through lending. They are looking for acquisitions. Further, with the general sluggishness of the economy, the energy sector shines brightly, standing head and shoulders over other sectors. The shale boom is widely accepted as providing a five-year-plus window of opportunity. Because of this, PEGs, which might traditionally invest in computer tech, health care or retail, want to get their investment dollars into the energy sector.
Buying pressure has made things quite interesting for owners of successful businesses in our sector. The market has pushed pricing up and many of the business owners I know are currently experiencing numerous unsolicited offers to sell.
For many business owners, most or all of their wealth is in the value of the business, which is an illiquid asset. Selling all or part of the business is like taking chips off the table in a game of cards. Selling a piece of one’s business to recreate liquidity in an otherwise illiquid holding is called recapitalization.
A growing company may require more capital than the business generates from operation cash flow. For most companies, cash flow lags behind revenue; cash flow is even further behind expenditures required to support that revenue. A company in growth mode constantly needs to reinvest in the business. Because of this, the growth company has the capital needs of a much larger enterprise. Owners will often reach a point where they don’t want to put their own money at risk to achieve a vision for growth they otherwise foresee as achievable. This may be a good reason to sell, but it is a better reason to recapitalize.
Let someone else take it to the next level
Entrepreneurs running successful lifestyle businesses often can’t grow further because “there is not enough of me.” There is a natural transition during the life cycle of a company that occurs as it needs more people and infrastructure to handle the larger volume. It has to shift from an owner-centric business into a management team-led, highly structured entity. Sometimes an owner may even be getting bored. Have you ever heard the expression serial entrepreneur? An owner selling his business so someone else can take it to the next level isn’t indicating he can’t run the business; he may be setting his sights on his next business venture. Many owners simply don’t have the interest (or may not have the ability) to design, implement and run a highly structured company. Bringing in a new owner/partner may be the best way for the company to continue its growth.
These are only some of the more common considerations. Others include divesting of a division/product line because of a lack of synergy, deleveraging a business and, the most common, considering retirement for personal reasons. One thing is certain; if you have a saleable business in the energy sector, the market will support it.
If you would like to confidentially discuss valuation of your business or considerations for selling/buying, contact Brinsko at (281) 538-9996 or email@example.com.