If you are selling your company over the next few years, the market is sitting still, as Dennis Tobin, Blaney and McMurtry, puts it, the Ancient Mariner poem sums up the markets with the description of that painted ship on the painted sea.
What the CVCA conference did this year was forecast the market for the next few years.
"In the realm of private company succession planning, over half of Canadian family business owners are not expecting an intra-family next generation transfer and a third are hoping to attract a private equity investor (PwC Capital Markets Flash, January 2012). This transition is already happening. Over a quarter of family businesses plan to embark on a transition within the next five years. Sellers need to understand where they are in the market, what the prices are like and what options they have. The current trends will impact those options."
Dennis points out that the transactions are changing and the prices are being impacted.
"There are some less obvious factors in the market putting downward pressure on prices such as the need by private equity firms to turn over portfolio companies and some more mundane reasons such as company earnings that have not yet recovered to 2007 levels.
"In order to best position themselves for a potential sale, sellers should evaluate their options: transitioning through family succession or a management team, bringing in a strategic investor or approaching a strategic buyer. One of the propositions put forward by the organizers of the CVCA conference was that “active management by highly skilled private investors is the secret sauce. These investors jump right into their portfolio companies, working alongside management to truly transform these businesses”.
""Companies looking to transition within the next five years should start by cleaning up their books well in advance of a planned transaction. Failure to do so could at best defer closing and at worst uncover surprises that would push investors to walk away from the deal. Private businesses should also make sure they qualify for the capital gains exemption to maximize return on the sale of the business. Certain assets in the balance sheet could disqualify business owners from claiming the capital gains exemption. Complex corporate structures can also deter potential investors and buyers. Simplifying the ownership structure can take time and should be dealt with well in advance of seeking a transaction.
"Sellers looking for an exit should also spend less time in the business and more time on the business by focusing on maximizing value, prioritizing goals and increasing profit margins. Sellers should market their business as a target by determining who needs their business from a competitive, market and strategic partner standpoint. Strategic buyers are willing to pay premiums and premiums can be justified when sellers are offering exposure to new markets, increased market share, economies of scale and the addition of capabilities that leverage much larger existing opportunities for the buyer.
"Sellers should also look at new markets for potential buyers. For every dollar on the sidelines in Canada, there are many more in the USA. Foreign interest is also increasing for cash rich investors looking for safe or strategic investments in Canada, especially in the natural resources and real estate sectors.
Perhaps while the venture capital and private equity markets are in the doldrums, owners who want to grow or exit their businesses should check their charts, clean their decks and fix their sails, as both fair winds and gales are in their future. In the meantime,
Day after day, day after day,
We stuck, nor breath nor motion;
As idle as a painted ship
Upon a painted ocean.
-Coleridge-Rime of the Ancient Mariner
