Why does it take so long for an entrepreneur to sell their business these days?
I was having dinner with an veteran in the world of middle market mergers and acquisitions. “Twenty-five years ago, I could sell a small business in six weeks,” he grumbled. “Today, I consider it a miracle if I can close a deal in 6 months.” And while deals may rarely have closed in just six weeks, in general, the numbers back him up: Between 2000 to 2007, the average time it took to sell a small- or mid-size business to a financial buyer was six months. From 2008 to 2012, that doubled to 12 months, and I’ve seen deals approaching their second birthday.
This isn’t due to a lack of funds on the part of financial buyers. Private equity groups are sitting on $430 billion dollars - yes, billion with a B - and it needs to be invested in the next couple of years. The problem is that although the money is better than ever, the bar is set higher than ever.
Here’s how a private equity group works: They raise a fund of money from investors, such as pension funds and insurance companies, and use that money to buy equity in various privately-held companies. The idea is that the new money and expertise will make those “portfolio companies” better and more profitable, and everyone will see a nice return on their investment. Every five years or so the private equity firm raises money for a new fund, and the process starts all over again.
The bottleneck is that, due to the weak economy and global uncertainty, the fund raising environment has become very demanding. If a private equity group loses money on one portfolio company, they’d better have a home run with another company in that fund. And if they have two bad investments, their ability to raise a new fund is next to impossible.
So, frankly, the financial investors are scared. They’re stuck with an obscene amount of money and can’t afford to put it in the wrong company.
Two or three decades ago, when this kind of deal-making was just beginning, the buyer essentially wanted to know only one thing: Is this company earning what they say they’re earning? Then buyers began to insist on financial statements that had been audited by an independent accounting firm. Now, more and more buyers are asking for a quality of earnings report (QOE), which validates the selling company’s true EBITDA. When you add in third parties like banks, lawyers, and insurance firms, it’s easy to see why the sales process now takes so much longer.
To the extent that this ensures that private equity groups will make good investments in solid companies, all this fact-checking is a good thing, even though it complicates matters. Unfortunately, when you’re a company owner who has a well-performing company and is motivated to sell, time is not on your side. The “honeymoon period” can wear off, and the buyer becomes more likely to find reasons to lower their offer.
So when you’re ready to sell your company, prepare well ahead of time and start the process early. Get your financial statements in order and put together a good group of people on your selling team. The money is there, but the bar is very high.