I speak at many industry conferences across North America. And I speak with a lot of business owners. There is a sense that now is a good time to be a business owner. Generally, the business owners I speak with see a lot of opportunity in their respective industry, despite numerous headwinds. I’m of the same opinion. Now is a great time to be a business owner. I grew up working for my family’s business and there are many benefits to owning one.
But I’ve heard from a number of owners who expressed frustration with the direction of their particular business or industry. Still others confide in me that, despite the headwinds, the business is making money now and generating healthy cash, so they are not concerned about the challenges. Generally, while most responses are optimistic, many acknowledge that things “just ain’t what they used to be.”
There is a lot of opportunity at present for entrepreneurial business owners both to exit or to grow. If you are exiting your business, there has been a strong seller’s market for the past three years plus. And we continue to see a strong seller’s market at present. We think that is a positive thing for both buyers and sellers. As a buyer, there are a number of quality assets in the marketplace. But looking ahead, we also see some headwinds that can change the market dynamics. As quickly as prices and the number of sellers have risen in the past three years, prices and liquidity can drop even quicker.
If you have a timeline of at least 10 to 15 years, this is a great opportunity to reinforce or build up your business and generate strong profits and cash. The benefits of taking advantage of affordable and accessible capital to grow your business through inorganic acquisitions-based growth is compelling, especially if you operate in a fragmented industry. So, too, is the opportunity to re-invest low cost capital in positive net present value (NPV) projects that drive organic growth.
Of course, this may not hold true for everyone. Some business owners in highly competitive markets may find that competition will increase faster than they can keep pace, or, perhaps, that new and changing technologies put pressure on traditional business models. But business growth is never a straight-line proposition. While there may be challenges, I believe over a 10 to 15 year time horizon, there is also plenty of time to adapt your business model to take advantage of opportunities that present themselves in the marketplace.
The Big Risk
But if your timeline is less, you may be overlooking system risk to your business that arises as a result of business and economic cycles. The big risk I see is the “wait and see” approach, especially for business owners who have a shorter timeline than 10 years. The “wait and see” business owners I talk with are those whose businesses are doing well and/or generating comfortable returns for shareholders. Many of these businesses are operating very successfully in competitive markets that already have multiple, substantially larger competitors. These businesses have established a niche presence, have been early adopters of new technology, or generally developed a competitive strategy that continues to provide well for the equity holders.
These same “wait and see” business owners I speak with also acknowledge that now is a good time to be a seller. Many of you lived through a previous down cycle... or two or three (early 80s, early 90s, early 2000s, 2008 — notice the trend?). They recognize prices to sell a business are better now than they have been since the mid-2000s. They have also seen their peers sell their businesses in this wave of economic expansion for handsome sums. And the cognitive mistake that is made is that many of these owners assume the party will continue to last. Or that they will be able to exit before a downturn.
But, as humans, we are generally bad at predicting the future. We have a bias that assumes the way things are now will be the way things will always be. Even when we know things will change, our subconscious tells our conscious brain that things will not change. And even though we know things will change, we convince ourselves that there is no need to change our current course of action.
The big risk here is not that the economy will dramatically implode, but, instead, that a series of small changes in buy/sell activity, perceived risk, interest rates, economic growth and multiple other factors will have big impacts on the ultimate value of your business. A bear market can easily result in a downturn that erases 40% or more of the value of a privately held business. To recover that loss, the same business would have to increase in value by 10% annually for at least six years consecutively just to get back to even, and that does not consider the time value of money or the additional risk the business owner takes in the form of owning and operating a business. As Baron de Rothschild famously quipped, “I made my fortune by selling too early.”
What Is an Owner to Do?
If you’re not sure what the next best step is to take in your business, I want to help. I use two questions to drive the conversation: “What is your timeline?” and “What is your walk-away number?” The answers to these questions help provide an outside perspective to your business. Generally, the longer your timeline, the greater your options to invest in your business to maintain or increase value. We work with companies on both the buy side and the sell side. While now is a great time to sell a business, we also recognize that now is a great time to grow a business as well. There is no one-size-fits-all answer.