Deciding to sell a business is a major milestone, significantly influenced by changing market conditions and industry trends. We've analyzed market data and reached a somewhat controversial conclusion: selling in a less active M&A market might actually be more advantageous!

Our Findings:
We examined historical data to construct two scenarios:

1) A business owner sells in a buoyant market (2007 before the Great Recession)
2) The owner misses this opportunity and sells during the recession's depth in 2009.

In both scenarios, we assume the owner pays a 20% capital gains tax on gross sale proceeds. We consider the average sale multiples paid by private equity buyers in each scenario. We also presume the business owner, having secured a significant payout, wisely invests their earnings in an S&P index fund, reviewing their investment in February 2014 (five years after selling in the 2009 scenario and approximately six and a half years after selling in the 2007 scenario).

Scenario 1:

Business with $2M in EBITDA; sold in October 2007 (“peak stock market”).

5X EBITDA purchase multiple = $10M pre-tax; $8M post-tax proceeds.
Investment in the S&P 500 Index Fund.
Outcome: By February 2014, this diversified portfolio increased to $10.33M.

Scenario 2:

Business with $2M in EBITDA; sold in February 2009 (“S&P’s lowest in 13 years”).

4X EBITDA purchase multiple = $8M pre-tax; $6.4M post-tax proceeds.
Investment in the S&P 500 Index Fund.
Outcome: By February 2014, this diversified portfolio increased to $15.33M.

Caveats:

This assumes the business consistently generates $2M in EBITDA, even in a cooler market. In reality, EBITDA might decline, affecting both valuations and transaction multiples. Our calculations show that even with a 40% drop in EBITDA, selling in 2009 still yields a higher value portfolio in 2014.
Business owners' tax liabilities vary depending on corporate structure. We'll explore this further in a future post on tax-optimizing a business sale and share scenarios for various business structures.
While this is a simple, broad example across the entire equities market, the reality is boom and busts differ in timing from industry to industry. For instance, in the most recent Covid Recession of 2020, tech companies boomed while many other sectors lagged behind.
This analysis also assumes there is a ready demand for business acquisitions. There may be fewer buyers in a recessionary environment. However, we think the lower multiple captures some of this weaker demand.

Our analysis shows business owners shouldn’t worry too much about missing the boat on a buoyant market, as the data shows selling in a down market presents unique diversification options for business owners to “ride the wave” back up.

Selling in a Buoyant Market:

Pros:

High Buyer Interest: A larger pool of buyers, often leading to higher business valuations

Cons:

Limited Diversification Opportunities: After a lucrative sale, finding equally profitable investment opportunities can be challenging. Counterpoint: business owners who know if their diversification options are overvalued can wait for a market correction and “get the best of both worlds” (sell now in 2007 at peak, but wait to invest the proceeds until 2009).

Selling in a Cool Market:

Pros:

Diverse Investment Opportunities: The proceeds from sales in cooler markets can be reinvested for substantial returns as the market recovers.

Cons:

Lower Demand: Cool markets often see reduced buyer interest due to economic downturns or market saturation, impacting valuations and multiples even for the same business performance. Counterpoint: business owners who engage a business brokerage during this time may be able to run a competitive process to attract multiple buyers and get a higher multiple than average.

Making the Decision: Sell Now or Wait?

So should the business owner wait for all the forces and stars to align to maximize their nest egg (e.g. sell in a *hot* sector of the market when the rest of the market is cool?). We think that would be a mistake, as “timing the market” is as much about luck as skill. As the old adage goes, “A bird in the hand is worth two in the bush”. Having an opportunity to sell now should be weighed against:

Future Growth Prospects: Balance the potential for business growth against the uncertainties of future markets, and the risks of declining customer demand.
Personal Goals Alignment: Consider how selling aligns with the business owner’s long-term personal and financial objectives.
Benefits of Diversification vs Benefits of Control: Related to the above, do the benefits of having more control over direct business outcomes outweigh less control over market conditions (and the benefits of a diversified investment portfolio)?

Exit Advisors assists business owners in navigating their exit. Our approach includes a detailed 'look under the hood,' enabling us to consult on maximizing business valuation in any market and identifying tactical improvements before identifying ideal buyers for a business. As specialized sell-side M&A advisors, we are dedicated to guiding and educating business owners at every step of their transition.