It’s all about supply and demand.
Here are some facts.
About 4.2 million companies or 70% of all businesses that employ more than one person are owned by someone who is aged 53 or older.
Around 8,000 people turn 65 every day and this isn’t changing for a while. Until the baby boom cohort is done. Most business owners have delayed selling their business because of the terrible economic recession starting in 2008. They were and are waiting for better market conditions.
Here are some more facts.
Private Equity Groups (PEGs) own 7,700 to 8,000 companies. By definition, a PEG is not a long-term owner of a company. They MUST sell the companies they own in a fairly quick time frame to obtain a financial return for their investors. That’s the nature of the private equity business.
The types of companies owned by PEGs tend to be larger than the average privately held company. If your company is smaller, that pretty much eliminates private equity firms as a buyer.
The available capital for buying companies is estimated at more or less $540 billion. That is about 10% of what would be needed to buy everything that could be bought.
When there is a large number of an item for sale but a limited amount of money to buy it, what happens? The price goes down. That is standard economics pricing theory.
What also happens is that buyers become more “picky.” I’ve repeatedly heard buyers claim they can’t find companies for sale that meet their exacting standards. They are exacting because they can be. Buyers want perfection.
It is easier to sell a company that is larger because, among other things, even though the purchase price is higher buyers view larger businesses as less risky.
Larger companies are what the professionally managed PEGs are looking for. It takes about the same amount of time and effort to buy a large company as a smaller one. So if you have to deploy a large pool of capital, it is more efficient to buy one larger firm rather than a bunch of smaller ones. That’s the dynamic with those types of firms.
We are now in a strong economy and Mergers & Acquisitions activity is relatively strong compared to past times. How long will that last? No one knows. But it will not last forever.
You can see the problem. A recent study showed that only 20%-30% of the companies put up for sale are ever actually sold. It may actually be lower than that. Other studies show even lower success rates.
The answer to this problem? Prepare now to sell your business. Do an exit plan. It is not too early, complex, or time-consuming to plan for your future.
Get a great team of advisors, including accounting, legal, tax, operations, valuation, M&A specialists, and so on. Do an exit plan with a professional. Find an ongoing experienced exit coach that helps you coordinate all these different technical specialties to complete the sale of your business at the best possible price.
This is the most important financial transaction of your life. Don’t do it alone.
