The secret of deal values is... timing

Someone once said that the secret of comedy is timing, but that could be said to be equally true of deal values.

The absence of any changes to the Capital Gains Tax regime in last week’s budget has once again driven many business owners to consider when might be the right time to consider selling their business. At the moment, the economy is growing, borrowing is cheap and there are huge amounts of capital seeking a good “investment” home. All in all, the right ingredients for a very buoyant mergers and acquisitions market, with deal valuations holding up very well.

Desirable, high quality businesses will always be attractive to potential purchasers, but the market for deal-doing is – like most other areas of commerce and business – not immune from the basic economic laws of supply and demand.  High demand from potential purchasers drives the value of businesses up, whilst an over-supply of businesses for sale forces business values down.

The secret, therefore, to maximising potential deal value is – amongst other things – getting that timing right.  That, however, is much more easily said than done – after all, fully operational crystal balls seem to be in short supply just at the moment.

In practice, therefore, perfect timing can only be assessed with the benefit of hindsight. In my experience, the temptation for business owners is frequently to hold on a bit too long; to continue to make hay whilst the sun shines; to get just one more year of good profits wrung-out from the business. All other things being equal, holding on to a business in order to continue to extract good profits, might seem like an entirely logical thing to do because, on the face of it, it’s not like it’s a zero-sum-game, right? Well actually, because of the importance of timing, that’s not necessarily the case.

In the past, we have seen plenty of occasions when deal valuation multiples have moved by more than 1x profits in around a year. By the time the effects of tax (corporation tax on profits and tax on distributions or remuneration) are taken into account, therefore, it is fair to say that in those situations the business owners actually ended up worse off by delaying a process for a year – despite the profits earned in that year.

In addition, changing market conditions, such as fewer potential purchasers, or a glut of similar businesses for sale, can even hinder the prospects of achieving a sale at all.

Of course, there are other factors to consider, and it is rarely the case that “all other things remain equal”.  Every situation – like every business – is unique and there are typically a wide range of other considerations such as the timing of major contract renewals or lease terms, the underlying growth of the business, the impact of external factors such as Brexit or COVID and not least the age – and health – of the owners, senior management and key employees. Even the wider Capital Gains Tax environment (and the potential threat of capital gains tax rises) is difficult to ignore entirely – although it should never be the primary factor in deciding whether or not to sell a business.

So how does a business-owner make sense of all of these – potentially conflicting – factors when it comes to deciding upon the ideal time to consider selling their business? In short, speak to a professional mergers and acquisitions adviser experienced in assessing and analysing such situations. They will help weigh up the pros and cons and assist in reaching an informed decision on timing. Ultimately, such advice is likely to be extremely valuable when it comes to selling a business.

If you wish to discuss how we could assist you, please contact a member of the Azets corporate finance team.