Investment banks commonly encounter two types of clients with radically different approaches to M&A. The first is a client who decides to sell on a whim, with little preparation, who wants everything to be as fast and profitable as possible. The second plods along, often for years, hoping to get everything right for a sale. So, whose approach is right? Neither. More time to prepare for a sale can mean a higher sale price, but there are limits on this prescription. Endless time is not in itself a valuable asset, and in some cases, waiting too long for M&A can actually cause value to decline.
So how should owners make the decision? Here are three factors to consider.
The Current State of the Business
Advanced preparation for a sale gives owners a chance to prepare for due diligence, identify their ideal buyer, prepare marketing materials, and set reasonable expectations about how M&A will proceed. If the business is not performing optimally or has management issues, more time can help clean things up to make the business more enticing to buyers.
Some signs that more time may mean a higher valuation include:
- The business is excessively owner dependent.
- The business is poorly managed.
- There are obvious opportunities for profit that the current team is not capitalizing on.
- The owner is not well prepared for due diligence or for a sale.
When these factors are present, it usually makes sense to delay a sale—unless an advisory team believes that cleaning up these issues will not add significant additional value.
Market conditions figure prominently into the ultimate value of a sale. When valuations and multiples are high, it may make sense to sell now, even if the business has some shortcomings. This is because a lower multiple down the road may cause owners to lose money even if the business is in better financial shape.
Likewise, inflation is an important factor. Right now, inflation is accelerating, which means that money today will be worth less in the future—and no one knows how much less. When multiples are high and a business is in reasonably good shape, selling now is safer than waiting for the future, especially when inflation is skyrocketing.
Reasonable Changes and Their Foreseeable Timeline
Ultimately, owners and their advisors must ask a few critical questions when assessing the value of waiting:
- Would more time add significant extra value? How much time and how much more value?
- Do market factors increase or decrease the odds of significant extra value down the road?
- Is the business generally ready to hit the market? If not, how much additional time does it need?
Owners often are poorly positioned to answer these questions on their own and may have numerous biases about their companies. A professional advisory firm, however, can help owners assess sale readiness and harness their full power to get the company M&A ready.