VENTURES: Now's A Good Time To Sell Your Business
Recent Western Cape Business News
OVER the past two years South Africa has experienced a recession. There have been very few buyers of businesses and with many undertakings having experienced poor results, it was not a good time to sell.
However, over the last few months, with the economy starting to emerge from the recession, buyers have been re-entering the market in a big way, looking for acquisitions as many are cash flush.
“With few sellers around due to the recent soft economy and consequent poor financial results, it has suddenly become a sellers’ market as the large numbers of buyers compete for the few available acquisitions,” says George New, manager, corporate finance at Horizon Capital, the Cape Town-based specialist advisor on buying and selling medium sized enterprises.
The increased demand for businesses during this time in the economic cycle is due to the following:
• Buyers’ views on the future economic situation and how it will impact on the business is a primary factor influencing the decision to buy. This outlook is generally more positive when an economy moves out of a recession into a growth or recovery phase.
• During a recession, companies cut costs and consolidate operations, generally maximizing the strength of their balance sheets and building up cash. As the economy emerges from a recession and investors see green shoots appearing, the focus shifts to growth and the acquisition process starts getting underway.
• Towards the end of a recession, interest rates are cut to their lowest levels to stimulate growth. These rates are kept low until inflation starts moving up. Low interest rates make the cost of acquisitions very attractive relative to the cost of funding them.
• As the economy moves further into the growth phase, corporate acquisition activity slows as the buyers merge and consolidate their acquisitions into their existing structures.
The factors indicating that this is a good time for certain businesses to sell are as follows:
• Sellers generally prefer to sell their businesses after a period of good results to get the best price, which is usually determined by a multiple of earnings. Certain businesses have done well despite the recession.
• The earnings multiples of unlisted businesses are generally a percentage of the earnings multiples of similar listed businesses. The multiples of JSE listed companies are currently at record high levels and a number of commentators currently feel that they are too high. Earnings multiples are currently way higher than historic averages over the last 30 years despite lower expected profit growth generally across the economy.
• Company profits are generally at lower levels after a recession. Buyers are therefore prepared to pay higher multiples taking into account that profits are at these low levels and should increase. Where a company’s profits are still at healthy levels, this can be a very opportune time to sell.
Says New: “We can see that the current climate presents a definite ‘window of opportunity’ to sell a business, as buyers are prepared to pay a premium for sound businesses. We have seen a significant increase in the number of buyers entering the market over the past six months. There has also been an increase in inquiries from off-shore, partly as a result of the World Cup and the positive attitude towards emerging markets. This demand, which is greater than the supply of good businesses, is pushing up the prices buyers are prepared to pay.”
Business News Sector Tags:
Fax 2 Email
Study IT Online
Work from Home