06 Feb Should I Sell Now or Wait
When is the right time to consider a merger or acquisition? 2023 was a challenging year for many tech-enabled services businesses as many end customers deferred projects or reduced technology-related spending. This doesn’t mean it’s a bad time to buy or sell, and in this episode we’re helping business owners determine if this is the right time.
2023 was a challenging year for many tech-enabled services businesses as many end customers deferred projects or reduced technology-related spending.
This stressed revenue growth and gross margins, reducing EBITDA for many tech-service firms.
It’s tough to run a business through these times, it’s easy for founders to become exhausted dealing with less while trying to run the firm as best as possible. If you founded a business in the early 2000s, you’ve been at it a long time and it may be time to cash out or at least remove some chips from the table.
With reduced profit and growth, many founders may defer selling their business as lower profits could lead to lower enterprise values.
We’d like to put a framework in place that helps business owners determine if this is the right time to buy.
Cash at close vs. Structure:
- there are deal terms that will produce higher enterprise values if payments are deferred.
- Earnouts can be based on hitting higher revenue targets
- Seller notes can help increase the overall enterprise value while creating an investment vehicle with market-driven interest rates
- Equity can be issued from the buyer, allowing for greater
Selling in vs selling out
- Selling-in during a downturn can give options for future payments in the form of deal structure
- Selling-in will typically have employment agreements that are at or similar to current salaries or market rates
Current market conditions
- Was 2023 just a bad year or something bigger? If growth slows or went backward and profit is down, but the market looks better, it might be a matter of riding it out until growth and profits return.
- Valuation trends: we’re not seeing a massive downturn in enterprise values based on the market, as buyers are looking for free-cash-flow which IT services businesses do a great job of producing.
Business performance now:
- It’s ideal to look at what’s working now and improve upon trouble areas. Buyers are always looking for strong sales, marketing, and delivery teams and that could create an opportunity.
Understanding your current investments and commitments.
- A business is oftentimes your biggest financial investment.
- There will be tax implications on any deal. Work with your tax professional to set up corporate structures and financial plans to help with taxes
- Understand your number: you’ll need to have an idea of how much money you need moving forward, especially in a case where you are selling out.
- Understand macro trends and investment options. Will the market have enough financial products available to provide consistent returns to the cash generated from the sale of the business?
Understand the risks of running the business
- Dividends are not guaranteed, and 100% of the risk is in your hands if you continue to run the business.
Work with an advisor
- Get a valuation to understand what your firm is worth today
- Work with your advisor to develop a list of strategic buyers who will be willing to see past short-term downturns.
- Tune up profit and growth: an external advisor can provide perspective on improving sales while increasing profit. Revenue Rocket can help evaluate your business and provide a roadmap and coaching to improve