Cabernet Sauvignon, hard cheese, a cast iron skillet, your favorite pair of jeans, The Princess Bride—some things simply get better with age.
Your business is probably not one of these things.
This is a hard truth for many sellers in the world of mergers and acquisitions. I have spoken with plenty of business owners who believe that the longer they wait to sell, the more valuable their businesses will become. Sometimes, owners assume that their businesses will continue to expand, unabated, more or less automatically.
Let’s call the myth of time as a guaranteed valuation multiplier the “fine wine fallacy.”
On the surface, some businesses appear to disprove the fine wine fallacy by steadily becoming more valuable each passing year. Don’t make the mistake of buying into these stories at face value: growth is never a given, and never occurs for lack of effort. The value of a company increases over time as its market share, intellectual property, and relationships with customers and employees grow, all of which take time. Time unto itself does not drive the value.
In other words, if you are close to retirement age, there’s no reason to dig in and wait to sell your business unless you have a detailed, foolproof plan in place. Without hard work and careful strategy, your organization is no better off in five years than it is now. In fact, there are numerous reasons to expect that your business will lose value over time. Here are just a few:
Economic Conditions Will Change
The flurry of M&A activity over the past few years is partially due to U.S. and global macroeconomic conditions that benefit parties on both ends of the negotiating table. According to Deloitte, themes influencing and catalyzing transaction activity include a strong U.S. dollar, low interest rates, reduced taxes, and few barriers to raising capital. These factors did materialize in a vacuum; they resulted from the economic rebound that followed the 2008 financial crisis.
Everything has historical context. Although we tend to think of economies as cyclical, each economy emerges from different factors, and each cycle has its own winners and losers. Post-2008 regulations such as Dodd-Frank held the banking sector back from M&A for nearly a decade, for example, as consolidations industries such as health care soared. In the years after the next downturn, expect the ensuing economic conditions (a new tax law, for example) to benefit some businesses while eviscerating the values of others.
Your Industry Will Change
If you are able to survive the next downturn relatively unscathed—with no new regulatory obstacles to face and your contracts and skilled employees still in place—disruption and innovative technology could nonetheless drastically change your industry and your position therein. Put another way, your business could end up a taxi company in a world full of Ubers.
New tech is already casting shadows over certain sectors. Automation and artificial intelligence could soon replace many accountants, factory workers, farmers, and others while providing new job opportunities in other industries. If your business doesn’t adapt, you may have trouble staying afloat, in which case diminished value may be the least of your concerns.
Your Energy Level Will Change
Even in an ideal scenario, with negligible economic and industrial shifts to worry about, your ability to lead your organization almost certainly will not remain the same as it is now. Chances are you will be equipped with less in an environment that demands more. As I recently wrote on this blog, the older you get, the more critical the decision to sell your business becomes. You never know what the future might hold, and the best advice I can give owners is to expect the worst.
It’s not necessarily a bad idea to delay the sale of your business. At the very least, time is on your side. But instead of simply waiting out the clock, use the time you have to start building your business’ value. In short: the only way to enjoy the fruits of your labor is to plant the seeds now.
(For more information and guidance about the right time to sell your business, check out this infographic.)
ABOUT MICHAEL N. MERCURIO
Business attorney and M&A lawyer Michael N. Mercurio serves as outside general counsel on matters related to business law, M&A, and real estate law. As a strategic partner to firm clients, Mr. Mercurio regularly counsels entrepreneurial individuals and assorted entities on all aspects of business and commerce, with a core specialty in mergers and acquisitions—both from the sell side perspective and buy side perspective.
ABOUT OFFIT KURMAN
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