Many businesses we work with are not only profitable but are also experiencing record profits. Why sell if the business is doing well? Here are some common considerations for those contemplating a sale or recapitalization.
- Timing the market. In the past two years, the M&A landscape, particularly in the energy sector, has shifted strongly toward the seller. The financial and banking issues of a few years back have ebbed, and banks are lending a bit more freely, giving buyers more capital and encouragement.
The banking crisis of several years back, combined with the 2016 election year, caused many private equity groups (PEGs) and companies to sit idle. Many strategic investors have cash on hand, and now banks can help them supplement that through lending.
More importantly, much of the investment community is “industry agnostic;” many investors don’t care (to a degree) where their money is being invested, so long as the investment receives an acceptable return at an acceptable risk level. Today, compared to most other industries, the downstream and midstream energy sectors stand head-and-shoulders above others. The shale boom, global chemical demand, aging infrastructure and more provide an opportunity for midstream and downstream service businesses, construction firms, and manufacturers. Because of this, PEGs that traditionally invest in computer technology, health care or retail, for example, want to get their investment dollars into the energy sector.
This buying pressure has made things quite interesting for owners of successful businesses in our sector. The market has pushed pricing up, and many business owners are currently experiencing numerous unsolicited offers to sell.
- Diversifying assets. For many business owners, most or all of their wealth is in the value of the business, which is an illiquid asset. Selling all or part of the business is like taking chips off the table in a game of cards. Selling a piece of one’s business to recreate liquidity in an otherwise illiquid holding is called recapitalization. This investor is also the source of more capital for growth and/or payment for other acquisitions.
- Capital needs. A growing company, even a highly profitable one, may require more capital than the business generates from operation cash flow. For most companies, cash flow lags behind revenue — and even further behind expenditures required to support that revenue. A company in growth mode constantly needs to reinvest in the business. Because of this, the growth company has the capital needs of a much larger enterprise. Owners often will reach a point where they don’t want to put their own money at risk to achieve a vision for growth they otherwise foresee as achievable. This may be a good reason to sell, but it is a better reason to recapitalize.
Let someone else take company to next level
Entrepreneurs running very successful lifestyle businesses often can’t grow further because “there is not enough of me.” There is a natural transition during the lifecycle of a company that occurs as it needs more people and infrastructure to handle the larger volume. By necessity, it has to shift from an owner-centric business into a management team-led, highly structured entity. Sometimes an owner may even be getting bored. Have you ever heard the expression “serial entrepreneur”? An owner selling his business so someone else can take it to the next level isn’t indicating he can’t run the business; he may be setting his sights on his next business venture. Many owners simply don’t have the interest or ability to design, implement and run a highly structured company. Bringing in a new owner or partner may be the best way for the company to continue its upward growth.
There are many considerations, including divesting of a division or product line because of a lack of synergy, deleveraging a business and, the most common, considering retirement for personal reasons like health, family, lifestyle, etc. One thing is certain: If you have a saleable business in the energy sector, the market will support it.
If you would like to confidentially discuss the valuation of your business or considerations for selling or buying a business, contact Jeremy Osterberger at (281) 538-9996 or firstname.lastname@example.org.