There is an old saying, “What goes up must come down.” As 2019 comes to a close, most business owners are finishing their business plans for 2020 and beyond.
Many owners, who are considering selling their companies, are asking “Should I sell my company now, or wait until after the election?” The answer is always the same – sell when the market is strong.
Mark T. Osler
Gary Miller
However, it can take from eight months to two years to sell a company depending on its condition and the market space that its operates in. So, for those business owners who are trying to time the market when it is at its highest, more often than not, they will be sorely disappointed. No one knows the exact time when the market will turn south, but when it does, and it will, many business owners will be caught unprepared unless they monitor key indicators that drive market change and prepare accordingly.
I advise clients to monitor both world-wide geo-political factors and the top 20 U.S. economic indicators as a guide to their decision-making process, since most businesses are effected by both.
Geo-Political Factors
Many medium and small businesses do business around the world and can be affected by changes in the geo-political sphere. For example, few anticipated the U.K.’s vote to leave the European Union, commonly called Brexit. Since the U.S has significant trade relations with the EU, changes to the EU’s structure and membership will affect trade between the EU and the U.S. The EU is made up of 28 countries. However, five countries (Germany, U.K., France, Italy and Spain) produce 70% of the EU’s total GDP according to the IMF World Economic Outlook. Therefore, Brexit will have an impact on our exports to both the U.K. and the EU in the future.
Other geo-political concerns include war, terrorism and conflicts that affect U.S. foreign investment, security, and trade as described by the Council on Foreign Relations Global Conflict Tracker. These conflicts could have a critical impact on the U.S. by directly threatening the U.S. homeland, triggering U.S. military involvement, foreign investment, or threatening the supply of critical U.S. strategic resources. These factors should be monitored continually for a quick response to unexpected events.
Monitoring the 20 Leading and Lagging Economic Indicators can provide insights that could affect businesses going forward.
20 Leading and Lagging Economic Indicators
The Conference Board, a global think tank for businesses, founded in 1916, publishes the Leading Economic Indicators (LEI) that often change prior to large economic shifts or adjustments in the U.S. economy and, as such, can be used to predict future trends over the next few quarters.
Lagging Economic Indicators are statistics that reflect past large economic shifts in the U. S economy and are used to predict long-term trends
These indicators are statistics used by economists and businesses. They are provided by the U.S. government, non-profit organizations and some private organizations. The economic indicators give businesses the information they need to make both short term and long-term strategic decisions — like selling or buying businesses.
The Conference Board’s LEI has 10 components as follows:
- Average weekly hours worked by manufacturing employees
- Average number of original unemployment insurance applicants
- Amount of new orders manufacturers make for consumer goods
- Time it takes to deliver new merchandise from suppliers to vendors
- Number of new permits for construction of residential housing
- New orders for capital goods, excluding defense goods
- S&P 500 stock index
- Rate of Inflation — adjusted monetary supply
- Consumer sentiments concerning confidence in the economy
- The spread between short and long interest rates (inversion curve)
Ten Lagging Economic Indicators identify the economic shifts that have already occurred and are used to identify long-term trends:
- Changes in the Gross Domestic Product (GDP)
- Income and Wages
- Unemployment Rates
- Consumer Price Index (CPI) Inflation
- Currency Strength
- Interest Rates
- Corporate Profits
- Balance of Trade
- Value of Commodity Substitutes for the U.S. Dollar (Gold and Silver)
- Retail Sales
Keep in mind that most economic indicators work best when incorporated with other indicators. For example, the Conference Board’s Consumer Confidence Index (CCI) has a component called the Expectations Index which reflects the sentiments of consumers on a short-term basis — six months. It is the most important component of the CCI. Included are three survey items that focus on business conditions, employment and income. The CCI is closely watched to help investors and business owners make short-term business decisions. By looking at multiple indicators and indices, business owners can make more informed decisions in their overall plans and investments and adjust their strategies accordingly.
If you are thinking about selling a business, you always want to sell when the M&A market is strong. M&A indices give insight to the strength of the economy and the direction the economy is headed. The M&A market always follows the strength of the economy.
For example, in a strong economy, a definitive purchase and sales agreement including the deal structure, terms and conditions, representations and warranties, more often than not, favor the seller vs. the buyer. More companies are looking for acquisitions to expand or grow their businesses when the economy is robust.
By contrast, in a poor economy, M&A activity slows considerably. Less money is allocated to purchasing companies and fewer companies are looking to acquire businesses. Deal structures usually favor the buyer vs. the seller. Negotiations are tougher and fewer transactions are completed.
For example, “earnout business structures” are far more prevalent in weaker economies vs. stronger economies, if a transaction is to be completed, at all. Also, only of the best companies on the market succeed in closing transactions. Middle of the road or weak companies often remain on the market for an extended period of time, many of which never close.
So, the answer to the question, “Should I sell my business now, or wait until after the election?” is easily answered. Sell while the market is strong. There is no doubt that we are in a strong economy given the record highs of the stock market, low unemployment, low interest rates among other factors. While most economists are predicting that this strong economy will continue, it will grow at a slower rate. And, of course, some economists are predicting that a recession will occur within the next 24 to 36 months. So, waiting could be a mistake. We may have reached a market high at this time that won’t be repeated for some time to come. But who knows?
Gary Miller is CEO of GEM Strategy Management Inc., a M&A consulting firm that advises small- and medium-sized businesses throughout the U.S. He represents business owners when selling their companies or buying companies and raising capital. He is a frequent keynote speaker at conferences and workshops on mergers and acquisitions. Reach him at 303.409.7740 or gmiller@gemstrategymanagement.com.