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The best time to sell a business is when performance is on the rise. Unfortunately too many owners wait until sales and profits flatten. Valuation multiples are sharply reduced under such circumstances. In fact, it is quite possible that current year performance has increased over the last year yet the enterprise value is lower. How can this happen?

In order to answer this question, let’s assume that the company has been growing for the last several years and that the external economic climate has remained unchanged during this period. It is critical to understand that the primary consideration in valuing growth companies is the buyer’s expectation of the future profitability of the company. If the company profits had been rising at a 20% rate for several years but grew just 10% in the past year, it is probable that a buyer may view this slow down as a reflection of the future trend. In this case the buyer may forecast future profits to be lower than what the same buyer would have forecasted a year earlier, when sales were rising at a 20% clip. Under this scenario, the present value of the forecasted earnings will yield a substantially lower valuation.

Business Performance
Unfortunately, usually when the owner is ready to sell, neither the business performance nor the economy are agreeable. With proper exit planning you may be able to align one or both of these important considerations with your personal objectives.

The number one reason for selling is burn out followed by retirement, cash out and illness. Only you can determine when your personal objectives dictate a sale. Thankfully most owners usually are not in a position in which they have to sell right away thereby enabling them to prepare the business to be optimally positioned to present it to the market.

Economic Climate
The one variable that is not at all in your control is the economic environment. Certain critical economic parameters influence overall M&A activity as well as valuations. It is essential to understand and monitor these factors if you are planning your exit. Such economic factors include but are not limited to: economic output, interest rates, capital gains tax rates and exchange rates. As illustrated in the chart on the next page, each of these parameters are favorable thereby creating a very healthy M&A environment.

Real GDP, the total value of goods and services produced, is the most comprehensive measure of economic output and has been strong since mid 2003. This strength provides buyers with more confidence in the future of the economy. As a result of this strength over the past few years there has been a huge increase in dollars chasing good companies. From 2001 to early 2003 the situation was distinctly different, with an oversupply of companies seeking a very limited supply of money. The result was low valuations.

The Bank Prime Loan Rate is an indicator of the value of alternative lower risk debt investments. All things being equal, the higher the interest rate the lower the value of ones company. Although the Fed has been raising interest rates, they are still historically low. The reason the Fed raises rates is to slow inflation (i.e. GDP growth). In order to raise valuations, as business owners, our objective is to grab a disproportionate share of the growth in GDP to more then make up for the rise in interest rates. The rise in rates represents risk to equity valuations so if your time horizon is relatively short you may want to consider selling sooner rather then later.

The Capital Gains Rate is at a 65 year low. In May of 2003 the government reduced the capital gains rate to 15% thereby giving a huge potential present to sellers of equity. How long this low rate will last is a big unknown. The record national deficit represents a large threat to this low rate. As mentioned above, if your time horizon is relatively short you may want to consider selling sooner rather then later.

The Exchange Rate is the value of the US dollar relative to foreign currencies. Currently the US dollar is valued extremely low. This enables foreigners to purchase US goods, including companies, at deep discounts. While it may not be the case that you will sell your company to a foreign corporation, US acquirers are competing for the same companies as foreign buyers. This pushes valuations up.

Real GDP	Interest Rates
Capital Gains Rate	Exchange Rates