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Performance and market forces drive company value

It’s the first question a small business owner thinks about when considering selling their business: “What is my company worth?”

Generally, a company’s price depends on its size and performance, timing in the marketplace, a buyer’s appetite and a seller’s willingness to sell. The price varies over time depending on these and other factors.

Tim Gerhardt, former owner of Allpoints, a commercial HVAC service company, describes his experience selling his company. “I began to get solicitations back in the early 2000s. Then, about 15 years ago, the calls stopped.”

Remember that at around that time the U.S. was deep into the Great Recession.

“About three years ago, the calls began again,” Gerhardt said. “The value I was offered was higher and the deal structures better than offers from before. I sold my business in 2020.” (Editor’s note: Balmoral participated in that sale as an adviser.)

At that time, financial investors (for example, private equity funds) were amassing large funds to make purchases, and service companies were attractive because of their steady cash flows. The same remains true today. These funds now have over $800 billion to invest, and this phenomenon plays a role in driving values higher.

Note that many financial investors already own mid-sized companies and are growing their business through acquisitions. This is creating large service providers and manufacturers with resources and scale to quickly dominate any marketplace.

Why would a company owner want to sell? In some cases, owners are ready to retire from the business having experienced multiple economic downturns, not to mention a pandemic. Others are finding it hard to compete with larger companies and their deep resources. Still, owners are concerned about potential tax law changes that could take a bite out of sale proceeds. All want to take advantage of good prices still being offered to sellers.

For the time being, buyers remain interested in building their businesses through acquisitions, and sellers may need to act while the environment is still favorable. Company size and performance are critical to the value, in tandem with the market forces.

Brooks Crankshaw is managing director of Balmoral Advisors, a specialized investment bank focused on advising owners on selling their companies. He can be reached at BCrankshaw@BalmoralAdvisors.com.

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