Flood of businesses for sale expected

Paul Herman
15 August 2012

Tweet
Facebook
LinkedIn
Google plus
Send to

Although a ream of companies is anticipated to soon come to market, nearly three quarters of sale processes fall down owing to inadequate pre-sale planning.

We can expect to see a significant surge in the number of businesses that are seeking an exit over the next few years driven by a number of determining factors, according to Paul Herman, CEO of bluebox. Three key factors are:

1. Private equity firms are looking for the opportunity to convert unsold portfolio holdings into realised gains. Many of these funds are sitting on a large pool of unrealised capital with the portfolio assets valued either below cost or below the carry hurdle rate. This is particularly relevant for larger companies acquired at high multiples during the cyclical peak years of 2005 through 2007. Many of these assets are now ripe for sale, having stabilised or improved their performance since the beginning of the current downturn.

2. Over the next 12 months, GPs will be eager to get "wins" under their belt before hitting the road to raise their next funds. Buyout funds are under ever increasing pressure to return capital paid in by their distribution-starved limited partners, who need the liquidity to meet capital calls on previous fund commitments in advance of signing up for new funds.

3. Furthermore, many private business owners needing or wanting to sell from as early as 2008 have been waiting to see if the market will bounce back in order to achieve higher valuations of their businesses. With the consensus view that the market is unlikely to reignite in the short to medium term, many of these business owners will take the view that the best time to sell may never come and that now is as good a time as any.

All of these factors are expected to create a flood in the number of businesses that arrive on the market for sale.

However, while the number of businesses seeking an exit is set to rise, there is another worrying trend, which makes the issue in the market far more significant. According to a Harvard Business review earlier in the year, it is estimated that more than 70% of sale processes do not reach a successful conclusion. For the sake of the market, something has to be done to ensure that the increasing number of exits sought does not simply result in a concomitant increase in sale processes collapsing.

One of the main reasons cited for a sale process collapsing is that the businesses being targeted simply don't stand up to the more invasive due diligence processes that have come into play as buyers have become more cautious. Prospective purchasers are now putting these assets firmly under the microscope and the sensitivity analysis around revenues is far more aggressive than ever. Businesses with significant operational gearing or holes in key areas of IP or tax just won't stand up to the simplest of due diligence processes.

Investors are much more nervous in their approach and can be easily spooked by the slightest of issues that previously wouldn't have caused them to walk away. That, coupled with the fact that there is still a mismatch in price expectations between buyers and vendors, means that an increasing number of these deals are failing.

Sellers of businesses now need to focus much more closely on pre-sale planning to ensure that their prize assets achieve the best possible value on a sale and don't fall foul of a sale process itself.

Paul Herman is the CEO of bluebox