Given current economic conditions, it is hardly surprising that the Avondale deal makers are frequently hearing this question. This article considers how the current climate is affecting business sales, and also the more important factor of whether a specific business is ready to be sold. Regardless of market conditions, if a business is not desirable to potential purchasers, it is not a good time to sell.

Is the economy right to sell my business?

The last few years have seen the worst economic conditions than the majority of us have endured with most businesses focused on surviving rather than thriving. A few of the bigger players benefitted by absorbing weaker players, but these deals were few and far between. Whilst the wolf is still nipping at our heels, M&A can be an economic barometer and we are witnessing increased activity. According to a report produced by mergermarket, deal values in 2011 increased by 63.4% from £14.2B to £23.2B, and this upward trend is set to continue. There are several factors that are driving this demonstrable rise in activity both for buyers and sellers:

After the crash, competitive pressures on pricing are crushing; everyone is fighting harder for the same business. Low growth rates make organic expansion a tough strategy to pursue meaning that companies are looking to acquisitions to drive shareholder value.

George Osbourne's budget in March last year provided great news for mergers and acquisitions. Firstly, the news that Entrepreneurs' Relief had doubled to £10m reassured sellers that tax would not significantly diminish their gains. Entrepreneurs' Relief is a lifetime allowance of £10,000,000 of capital gain that will be taxed at a reduced rate of 10%, subject to certain conditions. Without the benefit of Entrepreneurs' Relief, Capital Gains Tax can be as high as 28%. Additionally, corporation tax was reduced by 2%. This was part of an overall drop with a further 1% reduction planned each year until 2014, and could free up cash to fuel growth and acquisitions.

The funding environment, whilst showing signs of improvement, remains difficult with the core banks focusing mainly on the larger end of the market. That said, some banks have been active in the mid-market, but at more conservative levels. Private Equity is the key contributor to the upward trend, with particular emphasis on the mid-market. Deal values increased in 2011 by 38% compared to the same period in 2010.

Business values are improving as buyers and sellers realise that potential growth has now become an achievable reality. However, many sellers are still sitting on the fence, waiting until they think it is the right time to sell. This in turn means that there are fewer, quality businesses available for sale, again driving the price.

Avondale have witnessed the impact of this in the increase in M&A activity. Seller instructions are returning to the same levels as 2007, buyers are showing equal enthusiasm, our active purchaser database has now reached 19,000 contacts, and we have achieved a 40% increase in deals secured in the last quarter over the previous period.

Is my business at the right stage to sell?

Business owners considering an exit, regardless of sector or economic conditions will be looking for the optimum deal value and structure. Generally, purchasers will calculate the value of a business using a multiple of the current adjusted sustainable operating profits. They will also factor in other elements such as savings they could make, cross-selling opportunities, intellectual property, brand and perception of risk. A professional M&A advisor can help you assess the potential value of your company.

The current condition of your individual business is a significant factor in timing its sale. Businesses that show a strong track record of steady or increasing sales and profitability will always sell faster and for a better price than those that are in a decline. If your sales are up or steady, this is a good time to sell. No matter the global or macro economic factors surrounding your company, if your revenue is up, the demand for your business and the sales value will increase.

If the value is not what you are hoping for, your M&A advisor should be able to help you increase this by examining strategic ways to increase the value and address the “multiple” influencers. There are many ways you can increase your value, including:

• Minimising the purchaser's perception of risk. For example, eliminate any dependencies on key members of staff, as well as clients. Also try to ensure a diverse customer base, so that you are not dependent on a particular market sector.
• Ensuring that you have a steady, recurring and forecastable income. Contracted income is a real incentive for both buyers and funders alike.
• Ensuring your systems are in order. Although confidence is returning, buyers and lenders are still more careful and risk adverse, hence will want more information before making a decision.
• Well-trained and motivated staff. Often for buyers, a company's principle asset is the staff. A buyer will look hard at the people before making a purchase.
• Strategic plans for long-term growth. Buyers and funders will be motivated by strategic growth plans to enhance sustainable equity value.
• Consider sector and geographic diversification and specialism. Your aim should be to ‘own' a niche marketplace.

Making such strategic changes will not happen overnight and crafting a business so that it is desirable to both buyers and funders can be a lengthy, complex procedure and should be in the forefront of any business owner's mind and a key part of their ongoing strategy. A professional mergers and acquisitions practice will be able to help you prepare your business so that you achieve aspirational deal value and structure.

The economic climate has rendered it crucial for Mergers and Acquisitions practitioners to stay up to date with the constantly changing funding environment so that we assist buyers and sellers in avoiding last minute funding pitfalls enabling them to successfully complete transactions. Irrespective of the economic climate, the fact remains that your business needs to be desirable to a purchaser. If it is not, your M&A advisor should be able to help you implement strategy to increase appeal and, subsequently, value.

So the answer to “Is now a good time to sell my business?” is not as simple as it would appear on face value. The economy is picking up and M&A activity is clearly increasing. The real question should be, “Is my business in the right condition to sell?”