Why Timing is Critical in Mergers & Acquisitions

We had a meeting with a potential new client today. The client runs a nice little $11M a year business. The company has been in operation for a …

We had a meeting with a potential new client today. The client runs a nice little $11M a year business. The company has been in operation for a couple of decades and is 50/50 owned by two long-standing partners who reside in different states. Today we discussed options, strategy and how we might assist them in the decision to ultimately sell the company. Much of our discussion revolved around timing. This client told us of the perfect example of how timing in M&A makes all the difference.

In painting a picture on how he started his current business, he went into detail about another business he had operated and sold almost three decades prior in a separate state. The business was in a dying industry being outpaced by newer, better and less expensive alternatives. The two owners could see the coming demise of the business and tried to make adjustments where they could, but knew time and technology would ultimately start nipping at their heels.

As fate would have it, however, the company received a solid offer for acquisition that same year. In the client’s own words, “we couldn’t jump fast enough to get rid of this dying dinosaur.” The new owners–some fledgling private equity group–were left with the bag. “The company was out of business in another 18 to 20 months and we had successfully dodged a major bullet,” he said. The new owners were not mislead, but they simply didn’t see the market forces working against the legacy niches of a changing industry.

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Like anything in life, timing plays a critical role. It can sometimes be the linchpin between success and failure. Almost nowhere is this more evident than in mergers and acquisitions. Think for a moment about those who had their companies on the market in 2006. Profits were at an all-time high, valuations were up and the buyers were biting. Sadly, our firm represented about five such companies who–when they were given what I might consider “golden parachute” offers from large public firms, walked away and said, “I can do better. I’ll just keep managing my business for a few more years.” We all of course knew what happened over the next “few years.”

Certainly valuations have improved slightly, but businesses in the private market are often one of those “lagging” economic indicators, forcing valuations down for longer than what owners would often hope. Those who truly miss out in these types of scenarios are the owners who–at the age of 70–had a business that was booming and then lost 80% of Enterprise Value overnight. One such current client of ours in the media sector saw a nearly $2 million hit to his bottom-line which has yet to recover. Timing is everything.

Issues relative to business sales timing are yet another blunder to avoid in M&A. Succeeding involves a soothsayer-like sense of macro-market forces that could impact your business when it comes time to sell. Sometimes it can be as simple as reading the Wall Street Journal and making inferences. Often it involves more of a gut approach to timing decisions. And, at other times, you never quite know what may ultimately occur.

Luckily 2014 has some silver-lining, but waiting too long when stocks are up, unemployment is down and volatility seems ever-present may prove a fatal error a business owner may regret in the not-too-distant future.



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