Timing the purchase and sale of your business correctly is a very important factor in this process. “Purchase and sale decisions are probably the most important a business owner makes and must be made carefully, taking expert advice,” says John Witter, CEO of Horizon Capital Corporate Finance, a Cape Town based, ’boutique’ Corporate Finance house, specialising in the sale and acquisition of medium sized enterprises.
When selling your business, getting the right advice is critical, as there are many factors to consider – namely; deal structure, financial considerations, customers, staff, culture fit, tax and legal implications, and of course, price. The selling price is determined by, amongst other factors, the simple economic principle of supply and demand. In achieving your best selling price, timing the market is very important – often the best time to sell is when everyone else is buying. This opportunity presents itself when an economy moves out of recession and into a growth or recovery stage, as we are seeing now.
Over the past two years, South Africa has been in a recession. There have been very few buyers in the market and, with many businesses having experienced poor results, it was not a good time to sell. However, over the last few months, with the economy now starting to emerge from the recession, buyers have been re-entering the market in a big way, looking for acquisitions as they 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 of Corporate Finance at Horizon Capital.
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 maximising the strength of their balance sheet 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.
- 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 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 therefore be an opportune time to sell.
From the above logic, we believe 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. “Horizon Capital has seen a significant increase in the number of buyers entering the market over the past six months. There has also been an increase in enquiries from off-shore, partly as a result of the FIFA 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,” says John Witter.
How does Horizon Capital assist in the sale process?
Horizon Capital gains an understanding of your business and your objectives; it assists in preparing the business for sale, wholly or partially; undertakes a valuation of the business; and prepares a comprehensive analysis detailing the business operations, financial position, forecasts, prospects and blue sky opportunities. It then develops a marketing strategy; compiles a list of potential purchasers; contacts potential acquirers in a discreet and selective manner; qualifies potential acquirers; identifies the optimal deal structure and negotiates a ‘fair’ price; thereafter finalising the Sale Agreement with all the supporting documents. Horizon Capital will also, through its banking and finance contacts, assist buyers to raise finance for the acquisition if necessary and formulate the optimal deal structure.
All transactions with potential buyers are governed by confidentiality agreements to protect the interests of all parties.
Please contact John Witter or George New on 021 425 8586 for further information.