It’s a Seller’s Market

When is the best time to sell my business?

Well, there are two primary variables to consider when thinking about selling your business: (1) Are you, the business owner, ready to sell? (2) Is the market saturated with buyers that are willing to purchase your business? It’s up to you to consider the former, now let’s dig into the latter.

When there is a bullish market, buyers are eager to spend their money. This creates a high demand and is the best time for business owners to sell. Why? Because high demand gives pricing power to the seller. Business owners are able to leverage this pricing power in negotiations to back up their higher asking prices. Additionally, high demand creates competition among buyers. When there are multiple buyers bidding for your business, they will offer more money in an attempt to beat out their competition.

What is a seller’s market?

A seller’s market is defined as a market condition characterized by a shortage of goods available for sale, resulting in pricing power for the seller. A seller’s market is a term commonly applied to the property market when low supply meets high demand.

Where does the demand come from?

Demand can arise from a multitude of factors. One of the biggest contributors to high demand is the availability of buyer capital. Currently, there is an enormous amount of capital that investors have stockpiled over the past year. This is due to investors bulking up their reserves throughout the pandemic in an attempt to protect their assets. Last year in 2020, total private equity deals reached $460 billion and they are sitting on a record $1.5 trillion in cash to invest. Strategic buyers on the other hand have stockpiled more than $2 trillion dollars waiting to be deployed. This imbalance of capital has flipped the market to benefit sellers as investors will be pressured to use this money to create returns for their investors. Thus, creating high demand.

Another factor that plays a key role in catalyzing high demand comes from a low prime interest rate, which is currently at 3.25%. The prime interest rate is used by banks to lend to customers with good credit and has not dipped this low in over a decade. The rate is largely controlled by the federal funds rate, which controls the rate at which commercial banks lend to each other and is low primarily due to the pandemic in an effort to help people borrow money.

Not to bore you with basic economics, but when the prime rate is low, investors get excited. Here’s why: buying a business is like buying a house. It is usually in the buyer’s best interest to put down 10 – 20% and finance the rest. Well, the same holds true for businesses. Most are paid for with a down payment and financed with an interest rate that reflects a point or two over the prime rate. When the prime rate is low, buyers get hungry to invest and use low-interest rates to obtain cheap financing. 

 Now is the time!

Seller’s will benefit from this bullish market and competition will drive valuations up. If you’re a business owner, now would be a great time to start planning your exit strategy.