2018 is going to be a fantastic year for those of us in the business of helping others buy and sell businesses. In fact, I expect activity levels and valuations to be through the roof. Why do I speak with such confidence you ask? Simple, the lessons of 2017 tell me exactly what to expect going into 2018.
Lesson #1 – Owners of strong businesses were reluctant to put their business on the market in 2017. I think this reluctance comes when the owner of a business with stable cash flow evaluates his post-sale reinvestment alternatives. If that owner feels he can make more money each year continuing to run his business than he can by selling and reinvesting the proceeds, he will choose not to sell. Yes, that’s an inherently risky perspective, but having talked with scores of business owners during 2017, I can say with confidence that’s why many of them chose not to sell, even though valuations were so high. But that attitude won’t last forever, more about that later.
Lesson #2 – Owners of strong businesses were getting unsolicited aggressive offers from strategic buyers. Organic growth has been slow, so corporate buyers looked for opportunities to expand their product lines, geographic reach or customer base through acquisition. Many business owners received calls from their competitors, suppliers or distributors expressing interest in buying their company. We refer to these as “strategic buyers” because they have strategic interest(s) in the acquisition. Strategic buyers are patient, so if you are on their radar, it is eventually hard to say “no” because those unsolicited offers are usually very attractive.
Lesson #3 – Valuations were a derivative of a company’s growth rate and profit margin. If you had one of those factors over 15%, you would have gotten at least a 6X multiple on EBITDA. But if your growth rate and profit margins were both over 15%, you would have gotten an 8X or higher multiple.
Lesson #4 – Never before has there been such an imbalance between capital looking for acquisition and the number of good companies on the market interested in being sold. Economics 101 calls this a supply-demand imbalance. Bloomberg reported a few months ago there was about $1 trillion of private equity capital ready to be invested. Private equity buyers were smart in 2017, they weren’t making stupid deals or reckless offers. However, I talked with dozens of professional investors very frustrated about their inability to find places to invest their capital. This is the basic economic principle of pent-up demand.
So going into 2018, we will see higher valuations for sure. The private equity capital is still looking to be invested, and with the passage of lower corporate tax rates, you can be sure corporate buyers with more investable cash will be more active in their growth-through-acquisition strategy. Increasing valuations and buyers being more aggressive in their outreach efforts will be a catalyst for heretofore indifferent business owners finally deciding it’s time to go to market.
Oh, and there’s one other lingering factor that will drive up activity levels in 2018. Most business owners acknowledge these good times won’t last forever. 2018 might be seen as the peak, and hence, the right time to harvest.
Even though 2017 was my most productive year ever, I could see 2018 being a 100% increase. I’m rested and ready, I hope you are, too.
JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee.
Tennessee Valley Group
Latest posts by Tennessee Valley Group (see all)
- That’s How We Do It In Our Industry - April 15, 2024
