FINANCE
BY DAVID ELLIS , CORPORATE FINANCE DIRECTOR
The secret of deal values is ... timing
SOMEONE ONCE SAID THE SECRET OF COMEDY IS TIMING , BUT THAT COULD BE EQUALLY TRUE OF DEAL VALUES .
The absence of any changes to the Capital Gains Tax ( GCT ) regime in the Autumn Budget announcements once again drove many business owners to consider when might be the right time to consider selling their business . Currently , the economy is growing , borrowing is cheap and there are huge amounts of capital seeking a good ‘ investment ’ home . All in all , these are the perfect ingredients for a very buoyant mergers and acquisitions market , with deal valuations holding up well .
Desirable , high-quality businesses will always be attractive to potential purchasers , but the market for deal-doing is 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 .
In practice , perfect timing can only be assessed with the benefit of hindsight . The temptation for business owners is frequently to hold on a bit too long ; to continue to make hay whilst the sun shines . All other things being equal , holding on to a business 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 ( i . e . corporation tax on profits and tax on distributions or remuneration ) are taken into account , business owners can end up worse off by delaying a process for a year – despite the profits earned 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 CGT environment ( and the potential threat of CGT 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 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 analyse 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 . Speak to your local Azets advisor to find out more .
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