Transcript
Matthew: Net of industry and sector and timing, what are some of the standard patterns that you see? A typical standard pattern is if you feel like you're trying to sell it's probably not going to work, right? But what are some of those standard things that you see yourself always repeating to all types of founders and all industries?
Mark Herbick: We get the question all the time, is now the good time to sell? And the answer is there's three things that we're looking for to determine the answer to that question.
So number one is, is the business sale ready? And what I mean by that at the most basic level, is everything kind of neat, clean, and tidy? Do you have good practices in place? Is the business running well? That's kind of the basic necessity. The more advanced necessity would be, is the business growing? Because a buyer is buying a business for what it is going to do for them, not what it's done for you.
And unfortunately, as of late, we've worked on numerous transactions where as soon as we started the sale process, sales started to decline. And initially it's kind of like, hmm, I wonder if that's just a blip. And then the next month comes and it's still going down, and the next month comes and it's still going down. It doesn't matter whether it's one or two percent or ten or twenty percent. At the end of the day, it's a trend line. And the buyer is thinking, do I want to buy a falling sword?
So the business really needs to be, worst case scenario, flat, because some businesses just don't grow. That's not the investment that the owner has made into growth. They've made it into a business that kind of maintains itself. So is the business in good shape and is the business growing is number one.
The second thing you're looking for is, is the market buyer or seller favorable or neutral? It's one of those three conditions. A buyer favorable market is generally a market where there's fewer buyers and more sellers, just like in the home market. A seller favorable market would be where there's a bunch of buyers and very few sellers. A neutral market would be where it's pretty balanced. And generally speaking, what drives a seller or buyer favorable market is the cost of capital. So as a good rule of thumb, if rates are high, then that's going to create multiple compression or valuation compression and businesses are going to sell for less than they would if rates were low, i.e. the pandemic when we had zero rates or low single digit rates, that's when valuations were at their peak.
So timing the market, it runs in stages that generally last kind of years. So you'll have a few years of neutral, a few years of seller favorable, a few years of buyer favorable. And then there's also that buyer seller favorable dynamic within each particular industry. It can be blue skies and sunny outside for everybody else and you may be living underneath a black cloud in your industry. So probably not a great time to sell. So that's number two, market conditions favorable.
The third one, which is really the wild card and which is what decides everything, is are you as a business owner ready to get out? It does not do any good to try to exit a business when you're in a position where the business is doing well and the market's favorable but you still love it. It's probably gonna be a very challenging deal process for you. It's like, who wants to get out of a marriage that they're happy in? That makes no sense.
The market could be terrible, the business could be struggling, but you're miserable. And that's a tough situation to be in. And normally the deciding factor is that look, I know market conditions aren't optimal, I know the business isn't great, but I'm kind of done.
