number of deals was down on 2011. So average deal sizes were bigger, but at the same time, multiples were down. In other words, businesses were being sold to private equity at comparatively lower prices than in 2011, and the businesses getting sold were the bigger ones.
The PE sector noted some optimism around future deal pipeline, which it noted as stronger than 2011. However, this was due to increased succession issues and converging price expectations – again not good news for vendors. The survey also noted that “Strong prices are still available for quality assets”. In other words,
those with strong track records and solid growth prospects.
The BizExchange Index tracks SME deal values. For the March 2013 quarter, it showed softening in prices for businesses with turnover less than $1m, but
prices on larger businesses noticeably stronger. Lastly, the Grant Thornton Deal Tracker 2013, which shows all reported deals, reveals the number of deals in 2012 to be 1,012; this is a third of the peak level in 2007 and
around the same as back in 1997.
So if you are an SME owner looking to exit, how do you sell your business for more? Or sell it at all?
It has always been the case that scale can affect the multiple your business attracts. Bigger businesses generally attract a bigger multiple because they likely have been around longer, hence show an ability to ride the ups and downs of business. They are also likely have developed better systems and processes, hence have less risk when the owner sells and leaves.
This seems to be even more the case than ever in a
market where confidence is down. It became very difficult to borrow from the banks during and after the GFC. Now that debt is more readily available, anecdotally we hear that there is still only a slow trickle of acquisition deals being put up for funding. Perhaps the perception of debt finance being difficult has become self-perpetuating for SMEs who view the process
as “just too hard”. The banks, whilst of course having more stringent risk controls than pre-GFC, have lending growth targets that need to be met.
All these factors are pointing at the same things. If your
business has a good story and solid future, if you have de-risked the business through systemisation and sharing responsibilities, then both buyers
and their bankers should take an interest. But the key to optimising your price at the moment may lie in scale. Maybe you have to sell now for health or financial reasons. If not, how can you grow the business
organically or by taking advantage of it being a buyer’s market and making an acquisition yourself?
We are told that it is important to have a niche, to stick to your knitting. However, that need not be interpreted as smaller is better, rather a need for focus. With the right strategic rationale and rigorous due diligence, an acquisition is often the quickest way to
achieve scale, whilst still working within your area of expertise. With synergies, one plus one can often equal more than two. And when it comes to selling your business for more, that scale could be the difference.