Last year, more than 13,000 U.S. companies announced plans for change-of-control acquisitions. While that number is down 4.8 percent from 2014, the disclosed value of transactions increased almost 12 percent to $1.9 trillion, according to Boenning & Scattergood, Inc., an independent investment banking and securities firm based in Philadelphia.
John Bankson, National Director of Business Advisory Services at Wells Fargo Private Bank, foresees a single-digit percentage increase in the number of private companies that will be sold in 2016. That projection reflects an abundance of private equity in the market to help finance transactions. It also signals a demographic ripple from the aging population of Baby Boomers. About four in 10 privately held businesses have owners older than age 55 years, he says, which means many will be undergoing succession planning during the next decade. The fact that values appear to have increased in 2015 bodes well for those sellers.
"It is a good time if you are ready to sell and your company is in good shape," says Bankson.
Equity sponsors, such as private equity or venture capital firms, accounted for 47 percent of buyers last year, while private companies backed by financial sponsors accounted for another 17 percent, according to Boenning & Scattergood.
Deciding whether to, when to, and how to sell your company requires preparation long before you put up the "for sale" sign. The process requires owners to assess whether they're ready personally for such a major change and whether their businesses are positioned to attract top dollar and succeed under new leadership, Bankson says.
"Working with a succession planning team helps determine the valuation of the company and a timeline for owners," he says. "Where do they stand personally and where is the company in its life cycle?"
Advisors can help owners evaluate their companies' rate of growth — falling into the categories of emerging, mature, or declining — to size up how attractive the company will be to potential buyers. For example, is the firm dependent upon a major contract that is expiring, or is the customer base diverse enough to survive the loss of a client?
Historically low inflation has damped the ability of companies to increase prices for their products, which means they have focused on strategic acquisitions aimed at geographic expansion and market share gains in order to boost profits, Bankson says. Buyers, in turn, often trim redundant costs to boost margins.
"Working with a succession planning team helps determine the valuation of the company and a timeline for owners." — John Bankson, National Director of Business Advisory Services at Wells Fargo Private Bank
As owners prepare to market their companies, one key step will be to assess the quality of financial statements they provide. While some internal financial statements may be acceptable, it is likely that higher quality financials, such as financial statements that have been audited by an independent accounting firm, will be necessary to support the sale of a more complex company. The sooner that assessment and upgrade is made, the easier the process will be, and the seller may attract a larger buyer pool. Another important consideration before negotiations begin is whether there are executives that owners would like to protect in the case of a sale, either through continued employment or life insurance policies.
These scenarios, says Bankson, explain why it's important to consider the trajectory of the market and create a plan with your advisor that helps show the potential outcomes of the sale or the passing down of a business to the next generation.
Advisors help owners predict what will happen after the sale, as much as they reasonably can, based on an evaluation of the business and personal needs. "How are they living — to what income and lifestyle have they become accustomed?" Bankson says. "Business owners may say they're living on half a million dollars a year now, so that means they need to sell that business at such a price that they can invest and maintain that same level of cash flow."
The costs of not planning ahead are high — often either at the expense of the owner's happiness or the loss of the sale itself. Fourteen percent of transactions announced last year were canceled or suspended, according to Boenning & Scattergood. In some cases, that reflects an owner's failure to plan ahead or a change of heart, says Bankson.
Owners may also be reluctant to discuss personal aspects of their businesses. "Some owners are willing to say that if something happened to them in the next decade their children wouldn't be ready to take over, or that they have a brother or a sister who is really good at sales but they're not the best manager," Bankson says. "Whatever the case may be, we want to help them walk through that."