Yesterday the Dow Jones Industrial Average flirted with 17,000 points.
Last month, GF Data reported “Middle Market multiples jump in Q1” as private equity buyers and their amnesic bankers jacked up offers on mid-market companies.
Knight Frank recently reported the cost of a London flat is up 7.5% over the same time last year; and similar trends can be seen in many real estate markets around the world.
Internet stocks are fetching multiples of their revenue again.
It seems everywhere you look, valuations are up. All this froth could lead a business owner to say that now is the perfect time to sell.
But most owners who sell will have to do something with the money, which usually means buying into an equally inflated asset class.
Let’s imagine you own a business throwing off $2 million of Earnings Before Interest Taxes Depreciation and Ammortization (EBITDA). Given how frothy the market is, you decide to sell when a Private Equity Group – pockets lined with cheap money from the bank –offers you 6 times earnings.
You win the lottery and walk with $12 million before expenses and taxes. Now you have to decide what to do with your money.
Buy stocks? Well, the Dow has more than doubled since 2008 and could be cut in half again. Maybe you decide to play it safe and put your money into a vacation home in Phoenix. While homes are still cheap there, the average price of $190,000 in April 2014 was up 75% since May 2011.
Would you want to put all your eggs into a real estate market that has almost doubled in the last three years?
Instead of real estate, maybe you decide to buy some technology stocks like Salesforce.com, which is trading at almost eight times revenue.
Missing the market
Now let’s imagine you wait. You ride it over the top, and the market for privately held businesses tanks. Financing dries up. The Dow drops to 11,000 (still more than 50% higher than it was in 2009) and the best offer you can squeak out is four times EBITDA, or $8 million.
Are you a loser?
Maybe, but you get to invest your $8 million (less after closing costs) into a stock market at 11,000 points, which means if the market climbs back up to 17,000 – a 55 % increase – then your $8 million goes to $12.4M – half a million more than if you had sold at the top.
The problem with timing the sale of a privately held business is that the owner(s) still needs to do something with the money.
So, is now really the perfect time to sell? Or is it perhaps better to wait until your internal operations and metrics are sound and then sell when you’re ready, regardless of what is happening with external markets – because whatever market you sell into, you will have to buy into the same market conditions.