Buyout activity is booming for American small businesses, and the prices being paid are at or near records for companies up to $50 million in value, brokers say.
Many small-business owners are fielding more cold calls asking if their companies are for sale, and owners who do put their businesses on the market are often receiving multiple bids.
“I’ve been doing this for 20 years, and I can say that if this isn’t the top market, it’s the top one or two in recent years,” said Scott Bushkie, principal at Cornerstone Business Services, a mergers-and-acquisition firm based in Wisconsin that works with lower middle market companies. “You’ve really got the stars all aligned.”
A number of factors are contributing to the hot sales market. Lower taxes and lighter regulation have improved sentiment, for one. Companies that want to grow may see an acquisition as the easiest way to get trained workers amid a tight labor market. And the Baby Boomer generation is looking to sell and retire.
The jump in activity has pushed prices up. Mike Shea, president and CEO of Shea Barclay Group says his company has made three acquisitions in the last 16 months. “It’s really unprecedented, not only the volume of deals, but the competition for deals,” Shea said. “We’re excited to be on the buy side, but we also take into consideration that it almost reminds you of the housing market: Are we at the peak?”
Even recent increases in interest rates, which would seem to be a deterrent, haven’t dented deal activity. If anything, they may have pushed some buyers to make their purchases before rates moved even higher. “You would think there would be a tipping point” from higher rates, said Craig Everett, finance professor at Pepperdine Graziadio Business School. “With the tax and regulation environment a little bit more business-friendly now, maybe that’s delayed the change in valuations. But it seems like everyone thought that the valuations would be going down by now, and it hasn’t.”
Here’s what experts say small business owners should take into account:
— If there’s a time to sell, this may be it.
“A lot of times the owners wait a little too long to sell,” said Everett. “They wait until the business starts to stagnate, and then they think of getting out.” But owners will always get a better price when their business is growing.
— Selling doesn’t have to mean leaving.
Jeff Kaplan, the founder of cloud-service provider Breakthrough Technology Group, had long declined calls from potential acquirers as he focused on building the business. But he recently decided he wanted a more national scope, so he sold a majority stake to Abry Partners, a private-equity firm, in December. A few months later, Breakthrough Technology Group merged with another company owned by Abry, NexusTek.
Kaplan, now chief revenue and strategy officer at NexusTek, says he doesn’t miss being the owner of his own business, in part because the company now has roughly 10 times more employees.
“I’m excited because now we have more capital, more access, more people,” he said, “and we can really tactically execute on the vision” to become a national leader in what has been a regionalized industry.
— Have a plan in place for selling or handing over the business a few years before you plan to retire
Even if you don’t want to sell now, have a plan for when you do. Opportunities can come suddenly. So can an illness or other changes that could push up the timetable for a sale.
“The majority of small business owners do not have a documented succession plan. Some have a plan up in their head; some may have a one-pager,” Karen Reynolds Sharkey, a national business owner strategy executive at U.S. Trust, told CBS MoneyWatch.
Kaplan, of Breakthrough Technology Group, suggests paying attention to your bookkeeping, even though it’s a chore that’s tempting to put off.
“What will happen is there will be a point in time where you might get a call or you might be interested,” he said. “And if you do all that work a year or two in advance, it makes it a lot easier.”
