SWOT Analysis and the Sale of Your Business in 2012
People approach us here at FRG all the time asking how they will know when it is time to sell their business? Many of their concerns are focused on the obvious: timing of the sale to maximize the value; fear over the expiration of the Bush Tax cuts ending; fear of uncertainty in the future due to increasing government regulations and a lack of leadership from most elected officials; deficits out of control, both domestically and internationally, just to name a few.
One question we ask in response to their concerns is, “Have you done a SWOT analysis for your business”?
SWOT Analysis is a strategic planning method used to evaluate the Strengths, Weaknesses, Opportunities or Threats in and to your business. SWOT analysis is considered a method of categorizing key internal and external factors that are important to achieving both your long range goals for your business and, ultimately, the exit strategy from your business.
Strengths: What does the business do? What is its primary function? What makes the business special and how does that give it a competitive edge over others who perform the same functions or manufacture the same products? We live in an age of uncertainty. Many businesses can thrive for many years protected by their market niche but ultimately, the business will reach a place where change is inevitable as the old way of doing things limits competiveness. Part of assessing the strength of the business is having a longer range strategic vision that analyzes the next three parts of the SWOT Analysis.
Weaknesses: What factors, either under your control or not, could put your business at a disadvantage? This could mean lack of succession planning, competitive threats, need for an infusion of capital to grow your business or keep it competitive, management problems (competition amongst key management or lack of adequate management to sustain growth), losing customers due to a lack or innovation or distribution, lack of a long range vision for your business, “we’ve always done things this way and the business has been food to us”, trusting loyal vendors (accountants, attorneys) who are not geared up to see the risks nor opportunities.
Opportunities: What are the external or internal changes that could optimize business performance? These are only limitless if you have the ability to envision them and act on them. Envision means a thorough analysis of your competition, what your market share is and how sustainable that is, what is your acquisition strategy is or how you intend to grow your business, where the new market share will be coming from and how you can be truly opportunistic through innovations, new employees and IT. Most businesses that have survived the past few years are leaner and are more efficient. This will translate into a higher valuation if you prepare the business properly for the future.
Threats: External and internal threats that could harm your business: These include the potential looming increases in regulations or regulatory agencies such as the EPA, employee dissatisfaction, competition from abroad entering the US markets, credit markets continue to be problematic for small businesses, acquisitions integration problems or not making the right organic growth decisions, increases in interest rates and the cost of capital, missing the wonder-thunder years where the business is rapidly growing and you simply hang on too long.
There are many facets to the SWOT analysis, one which FRG would be happy to explore with you. The primary reason to do this analysis now is to determine if 2012 is the right time for you to sell your business.
Why is it time to get in the queue for 2012? Expiration of the Bush-era tax cuts: In 2001 and 2003, Congress passed tax cuts proposed by President Bush. The expiration date was 2010. This was extended by Congress again in 2010. In February 2012, President Obama called for the end of these tax cuts for high-income households, and he increased the ante by calling for capital gains to be taxed at the same rate as ordinary income. This is an increase over his previous proposal of capital gains increases of 20%. This could be a great time for you to take some chips off the table.
Multiple on the sales of businesses are close to pre-recession levels: For lower middle market companies with enterprise values (EV) below $25 million, the data shows sales multiples for the first half of 2011 between 5.2 to 5.5 times EBITDA, which is near pre-recession levels. For companies above $50 million, the multiples are even stronger averaging between 6.8x and 7.5x EBITDA. Of course these multiples vary according to the industry and many other factors.
There’s money looking for the right deals: Private equity, corporate buyers and private companies are sitting on records amounts of cash. Many businesses have been waiting until their perception of the multiples they will get improve before they go to “market”. It is a seller’s market now especially for businesses that have shown sustained growth, good management, increased their market share (or not lost market share) and have made improvements to the business over the past few years.
The markets may be flooded soon with people trying to exit in 2012: The end of tax advantages along with Baby Boomers retiring in droves could spell trouble for anyone thinking of selling their business in the next six months. The accountants and lawyers will be swamped and if you are not in the queue ASAP, it will be 2013 before your business can realistically be sold.
Maegan A. Evans, Ph.D.
Director, Falls River Group
Falls River Group, LLC, a Global Merger and Acquisition Advisory Firm based out of Naples, Florida, and a member of IMAP. IMAP features some of the world’s most skilled M&A advisors from across the globe and with a diverse resume of industry expertise. For more than 35 years, IMAP advisors have worked diligently to deliver success for a wide range of clients.through 39 firms located in 30 countries (www.imap.com). Securities transactions conducted through StillPoint Capital, LLC. Member FINRA/SIPC.