BACKGROUND
The economy is starting to tilt. In fact, current macro-economic uncertainly is already repressing valuation multiples and creating buyer hesitation. J. Powell just this week announced that the Fed is on edge and closely watching leading economic indicators.  Powell indicated the Fed is now closer to a neutral interest rate policy and Jame Bullard, CEO of the  Federal Reserve Bank of St. Louis, stated that the Federal Reserve should consider pausing hiking interest rates at its December meeting to give itself more time to understand why financial markets have become so volatile.

This foregoing represents a dramatic change in tone from the Federal Reserve.  Mr. Powell noted the slow-down in forecasted car sales, which was evidenced by GM’s announced plant closings, as well as the dramatic slow-down in housing sales. The point is that after an unprecedented nine years of economic growth we are now facing signficant economic uncertainty. This uncertainty is further exacerbated by the tenuous Chinese/US trade issues.

To add further fuel to the file The U.S. Treasury yield curve just inverted for the first time in more than a decade. An inverted yield curve occurs when long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality. The inverted yield curve has preceded the last seven recessions going back to the late 1960’s.

Curent Volatility Drivers
-Inverted Yield Curve
-China/U.S. Political Uncertainty
-Fed Policy Uncertainty
-Slow- Down in Housing Sales
-Slow-Down in Auto Sales

SHOULD I SELL OR SHOULD I HOLD
While we do not pretend to have a crystal ball regarding the future of the economy, one thing that most economists agree upon is that economic uncertainty is currently the highest it has been during this exceptionally long nine-year cycle. Considering this current economic volatility and warning signs it seems only prudent for business owners who have been contemplating a near term exit to seriously consider at least preparing for such a sale now.   

Stock Price Recovery Time (S&P 500)

As can be seen in the chart above, from 1950 – 2018 there have been 11 periods when the S&P 500 dropped from its previous all-time high. On average it took 2.7 years for stock prices to recover. That stated, it took an average of 7 years for stock prices to recover from the previous two drops.

The Take-Away
Those business owners that continue to postpone a potential sale should be prepared to hold the business through a potential downturn and/or period of cyclical volatility. History shows downturns can last as short as one-year, on average approximately three-years and as long as eight-years.

Note
To execute an effective selling process generally takes nine months to a year. Therefore, owners considering a sale need to project what their company will look like a year from the date one begins the exit process.

APPENDIX

 LOCKEBRIDGE ARTICLES PUBLISHED PRE-2008 CRASH

1.  “For What its Worth”,
   Walls & Ceilings Magazine, May 2006,
   https://www.wconline.com/articles/84852-for-what-it-s-worth
   

Article Synopsys
In this article LockeBridge is warning all business owners whose businesses are sensitive to the health of the housing market to seriously consider selling their business if they do not have an appetitive to ride out a potential down cycle in the industry, which can easily last for five years.

Article Extract
“Timing is everything.   A significant decline in the National Association of Home Builders’ Housing Market Index over the last five months indicates a continued slowing in the housing market.  There does seem to be a relatively high level of uncertainty in the industry, so if your time horizon is relatively short, less than five years, you may want to consider selling in the near future while merger and acquisition activity is still relatively strong and there is an abundance of money searching for good companies.”

2. “Should I Sell or Should I Grow. How Will the Slowing Housing Market
   Effect the Value of Your Company?”, Walls & Ceiling Magazine, June 2006.

Article Synopsys
This article explains how macro-economic trends occurring in 2006 can dramatically negatively impact the enterprise value. Additionally, the article discusses common value deflators and how to minimize their impact on the business value.

Article Extract
“As I write this article on the 31st day of March, the Chairman of the Federal Reserve Board, Mr. Bernanke, presides over his first meeting of the Federal Open Market Committee, the group that sets interest rates. Today they announced that they are continuing the gradual interest rate-raising campaign. It was the 15th such increase since the Fed started tightening credit in June 2004. The prudent building supply company owner has to ask himself “at what point will rates hurt my business?

 The prime rate is at its highest since the spring of 2001. The National Association of Home Builders Market Index, a measure of builder sentiment, fell to 55 yesterday (see graph), the lowest figure since April 2003. At the same time, mortgage applications as measured by the Mortgage Bankers Association have fallen five out of the past seven weeks. These figures indicate a market slowdown. What does this mean to the value of your company?”

3. “Metal Industry Owners Face a Difficult Decision, Should I Sell or Should I Grow?”,
   Recycling Today Magazine, June 2006

Article Synopsys
This article explains how industry specific variables, relevant to the metal industry, such metal commodity prices, overseas shipments, etc., lead one to believe that valuations may have peaked and industry risk is high.  The article also provides pointers on how to mitigate such risk and ways to optimize valuation.

Article Extract
“As previously stated, the metals industry is at an all-time high. Where we go from here is anyone’s guess.  There does seem to be a relatively high level of uncertainty in the industry, so if your time horizon is relatively short, less than five years, you may want to consider selling in the near future while the industry dynamics are extremely positive and merger and acquisition activity is strong with an abundance of money searching for good companies.”

4. “For Sale?  How have unprecedented metals prices affected the value of your company?”
   Recycling Today, August 2006, https://www.recyclingtoday.com/article/for-sale-/

Article Synopsys
This article emphasized that there is a high level of uncertainty in both the macro-economy and within the metal industry.  It urges Business Owners that are not prepared to own their company in a potentially highly volatile business environment to seriously consider selling. The article further discusses how best to prepare for a sale of their company.

Article Extract
The objective of this article is to ensure that readers understand that several considerations will affect their businesses’ values and to encourage prospective sellers to put as much effort into the selling process as they have into their companies’ operations. After all, the average selling process lasts about one year, but when executed correctly, it can yield as much as the total cumulative earnings that the owner has made over the life of his or her company.

5. “Metal Industry Valuations”
   Recycling Today Magazine, October 2007

Article Synopsys
The author, Scott Waxler, is extremely sensitive to the historically high run up in metal prices and the implication on enterprise value for companies participating in the metal industry.  The article discusses valuation methods and how to account for metal price variability.

Article Extract
The unprecedented run up in base metal prices has necessitated the creation of alternate valuation techniques. Dynamically changing metal prices have resulted in a widening of valuation ranges for companies dealing with these commodities. Profit increases resulting from the increases in the underlying commodity price are not viewed as sustainable or controllable and therefore must be normalized.