There are several macro-economic factors working in sellers’ favor at the moment. The cheap debt and abundance of equity capital chasing a limited number of good deals, for example, are just a couple factors driving the market, according to Murad Beg, a partner at Provariant Equity Partners.
“If you're a seller and you've got a business that's got reasonably attractive growth prospects in an industry that people like — that can be different for different investors — you can get a very nice valuation for your company that would have seemed not possible a few years ago,” he says.
But sellers aren’t just motivated by the prospect of a high price for their business. Some are selling because there are things they’d like to avoid. For instance, having just gone through the challenge of managing their business through COVID, some business owners might not want to face the next great challenge. There’s also some urgency to sell sooner rather than later because capital gains taxes are expected to increase, which would cut into potential gains from a sale.
“The capital gains rate fear triggered a bunch of deal flow back in 2008,” Beg says. “That always felt like it was less of a risk. Now, it feels like more of a risk, if you believe what you read and see on TV.”
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Business owners who are considering a sale in this environment should first establish his or her (or his or her family’s) objectives. Some may want to exit their business entirely and cash out. For others, the objective may be to take some chips off the table while still looking to grow.
For those looking to add a partner, such as a PE sponsor, Beg says it’s critical to understand who your partners are going to be and their track record around how they practice their trade. For example, did they leave the companies they invest in better than they found them? Were they good partners? What do their returns look like?
“To me, if you assume valuations are relatively equal to one another or within spitting distance of one another, really understanding who you’re about to partner with is the next most consequential decision you'll make relative to your business career, other than the fact that you decided to give up some measure of control because you got some money for it,” he says.
It’s not always the highest offer that should win a deal. Rather, there’s value in having a strong sense of what it is going to be like to work with the new partner. That can minimize surprises after the transaction.
“Really studying who your partner is going to be is probably the most important piece of advice I would offer because it's not just what it means to you but also what it means to your employees, what it means to your customers, all the various constituents that are tied to a business, they're all going to find out that you did a transaction,” Beg says. “So, if you care about that, then and you're willing to go the financial sponsor route, really understanding who you're partnered with becomes pretty important because everybody's money is green. Valuation will take care of itself. It's really about how does the future look? And what do you want it to look like?”
Beg spoke on the Smart Business Dealmakers Podcast, offering his sense of the deal market and the factors driving deal value, as well as how he thinks the rest of the deal year will look.