Today it is possible to sell a portion of the company to take advantage of favorable market conditions and diversify your net worth, yet continue to run your company. So let’s consider whether now is a good time to seek liquidity—either partial or full liquidity.
The three considerations for evaluating the timing of an exit are:
Is the overall market for selling companies favorable?
Is my company’s recent performance strong enough to attract a favorable price?
Am I emotionally ready to either exit my company or willing to bring a partner on board to help me take the business to the next level?
It is not likely that you will experience the perfect storm where all three of these considerations flash a bright green signal simultaneously. Rarely do all the stars line up perfectly. Those who wait for that perfect moment typically wait too long to exit; they are forced to continue in the business longer than they desire or to accept a sub-optimal price.
But the answer to all three questions needs to be acceptable, or the timing is not right.
In 2011, the answer to the first question is that the market for selling most private companies is very favorable. The prices being paid today are not quite as aggressive as they were during the peak of the bubble in 2007 and early 2008. But they are close, and as good as we can expect to see in this new era of limited leverage for the foreseeable future.
Today U.S. corporations have more cash on hand than any time in history. They are anxious to put it to work, and acquisitions are the most expedient way for many of them to do so. Additionally, private equity firms have an unprecedented level of cash burning a hole in their pockets. There are over 5000 firms that have to invest in private businesses to justify their existence. During the financial crisis, private equity firms were focused on supporting or salvaging the investments they had already made. And they could not borrow money to finance new deals anyway. So we went about two years with very few transactions being done. A private equity firm cannot survive unless it invests all of its capital because its investors will ask for their money back—with a return—in either 8 or 10 years from the commencement of the fund. Today there is a significant pent up demand among both the strategic (corporate) buyers and financial (private equity) buyers.
Moreover, when selling a business, the concern should not be: How much do I get? Rather, it should be: How much do I keep? And that is a function of the tax code. Late last year Congress extended the Bush tax cuts. That means capital gains rates will remain at 15% until the end of 2012. These rates are the lowest in history, and guaranteed to increase when they expire in less than two years. As a former U.S. Treasury official, I would bank on it. Our current budget deficit is unsustainable, and tax rates will go up after 2012 and probably never be this low again in our lifetime.
So that leads us to the next question: How is your company performing? A surprising number of my clients did well in 2010. If you are in that boat, 2011 should be a superb time from a market standpoint. The field will get very crowded next year. But some businesses did not fared as last year. If you are in that boat, look at 2011 as a time to maximize your bottom line so you can cash in next year before tax rates escalate.
The final question is whether you are mentally, emotionally and financially ready to exit. I could write a book on that topic, but let me just summarize some key considerations.
First of all, give up the notion that you can sell your business and invest all the proceeds in Treasury securities with no risk and maintain the same income. If that is your criteria (I hear that all the time) you will never sell your company, because that is not possible. A low risk diversified portfolio of liquid securities will never yield the same return as a private company. You may think your company is low risk because you are in control. But from a pure finance perspective, it is not.
If you are not financially or emotionally ready to fully cash out today, you should consider selling part of your business to a private equity firm now, continuing to own a meaningful percentage and operating the business. Then you can set aside enough cash to take care of most or all of your family’s financial needs and sleep a little better the next time we have a financial or political crisis. It is not a question of if, but when. And you can have access to the expertise of professional investors who are trained in how to build business value. Out of over 5000 funds, surely there are one or two which you could get along with. Perhaps not. But to take your company to the next level, having some outside counsel usually helps. Then in 3, 4 or 5 years you can exit fully—have your second bite at the apple—and provide a nice return to your investors and yourself (and not have all your eggs in one basket in the meantime.)
If you are the type that does not think you could function with another owner in the mix, and you know you want to retire in the next few years, you should target the end of 2012 as the time to be safely out of the business to avoid sharing too much of your sweat equity with Uncle Sam. And since it generally takes up to 12 months to complete a sale transaction, you need to get busy looking for the right team of advisors to assist you in the process now. Maybe someone will ring your doorbell and make you an offer you can’t refuse. But that only happens in rare cases and fairy tales. To get the best deal, you need to have an advisor who will pro-actively approach every logical buyer out there and make sure you have several parties to negotiate with. A competitive process is the only way to assure a successful outcome.