Stockholders have been on a rollercoaster for much of 2020. The market was chugging along pretty nicely, continuing its steady and calm rise we saw from 2019…then COVID-19 hit. The Dow Jones at one point lost more than 38% in less than 40 days. Followed by market uncertainty and wild swings, the average investor was left reeling. Valuations of privately held business have also been turbulent. For the second quarter of 2020, we expect to see the average profit multiple decrease for the first time in many years.
Have I missed the opportunity to sell my business at the peak?
The answer to this question is: maybe. But should you care? Probably not. The thing many of us forget is that when you sell your company, possibly your largest asset and the biggest wealth-creating event of your lifetime, you have to do something with the money you make.
These days, that means you’ll have to turn around and invest your windfall into an asset class that is arguably somewhat bubbly in historical terms. The current stock market is unsettled. The price of residential real estate has been continuously growing in many major centers, but what will the future hold? The near-term expectations for commercial real estate are murky, with many companies realizing their workforce may not need the typical office space anymore.
How will all of these aforementioned realities affect your decision to sell or hold on to your business? Perhaps a look at recent history can shed some light on this difficult decision.
How does market timing affect the sale?
Let’s look at a hypothetical example. Two imaginary business owners are each running a company generating a pretax profit of $500,000. Rebecca sold her business during a down year, say 2015, for 3x her pretax profit. She would have walked away with $1.5 million pretax to invest in the stock market.
Now let’s imagine business owner Scott, who decides to try and time the market. Scott waited out the downturn and sold his business at the end of 2017 for 4x pretax profit, walking away with $2 million before deal costs. At first glance, Scott looks like the winner because he sold at the peak and got 4x profit instead of Rebecca’s 3x. But when we take a closer look, Rebecca would be better off today. Assuming she had invested her $1.5 million in the stock market, she would now have roughly $2.125 million based on the Dow returns for 2017 and 2018 of 13.4% and 25.0%, respectively.
What should I focus on instead of economic timing?
Timing the sale of your business on the basis of external markets is often a zero-sum game, because unless you’re going to hide the proceeds of a sale under your mattress, you’re probably buying into the same market conditions from which you’re selling out.
A better approach is to optimize your business against the eight things acquirers look for when they buy a business, regardless of what’s happening in the economy overall. Those eight key drivers of company value are:
- Financial Performance
- Growth Potential
- Switzerland Structure
- Valuation Teeter-Totter
- Hierarchy of Recurring Revenue
- Monopoly Control
- Customer Satisfaction
- Hub and Spoke
To many business owners, these drivers, without explanation, seem confusing at best. To better understand their meaning and to find out how you score on the eight factors that drive your company’s value, we are pleased to offer access to the Value Builder questionnaire. Learn more about Anders Business Transition Planning or contact an Anders advisor to find out how to add value to your business before selling.
