Don’t Stay Past Midnight – Reflections on Knowing When to Sell Your Business (Part 1)

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As of today, we are currently amidst the second longest period of economic expansion in our nation’s history.  To put this in perspective, between 19451 and the trough of the Great Recession in the late 2000’s there have been 11 periods of expansion that lasted, on average, 59 months.  Presently, we’re around 118 months into a growth cycle.  So, it’s hard not to wonder about when the next recession is going to arrive given that it seems content to be fashionably late.

You’ve probably heard the saying, “Pigs get fat, hogs get slaughtered.”  This essentially means, do your best to maximize your outcome, but don’t wait too long and miss out on the prudent window to sell.  As investors, we can’t and don’t attempt to time economic cycles, but there are indicators that we’ve learned to recognize in evaluating the best time for an exit.  In this multi-part series, we’re going to explore the following six business and market conditions that suggest that the timing could be right:

  1. Valuations are Historically High
  2. You’ve Experienced Multi-Year Growth in Revenue and Profits
  3. Expected Proceeds from an Exit Exceed Your Previously Defined Goals (i.e. You’ll Hit Your “Number”)
  4. The Industry is Experiencing Tailwinds from Positive Trends
  5. Value Remains for the Next Buyer
  6. You See Your Competitors Deciding to Sell

To kick off this series let’s start with a topic that we’re living in real time as investors:

  • Valuations are Historically High. You can’t plan for a favorable market to exit, but there’s more than enough data readily available to help you assess where valuations sit relative to historical levels. If valuations are at a premium to where you bought in and/or are elevated compared to prior averages, this can be a positive indicator that the timing for a sale is good. 
  • In case you’re wondering, “Yes, Virginia, valuations are indeed historically high.” This is due to a host of factors including a substantial amount of uninvested capital (or, “dry powder”) controlled by an increasing number of private equity funds, sustained low interest rates, and the emergence of other types of investors (e.g. family offices, search funds).  To put some numbers around the discussion, please see the chart below that highlights the average EBITDA Multiples for companies valued between $25-$250MM.  There have been some ups and downs over the past several years, but it’s an undisputed seller’s market right now.

Source: Pitchbook
  • And, don’t just take my word for it.  Andrew Carnegie said, “As I grow older, I pay less attention to what men say.  I just watch what they do.”  Consider how people who do this for a living, the private equity community, have behaved in this period of elevated valuations – many are selling anything that isn’t nailed down.

Stay tuned for the next post where we’re going to address point #2 from the list above, You’ve Experienced Multi-Year Growth in Revenue and Profits.  As always, we’re interested in your feedback.  To start a conversation, please reach out to Joe Schmidt (jjs@clearlightpartners.com) or Mark Gartner (mpg@clearlightpartners.com). 

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1 We begin this measurement period at 1945 which is when many economic indicators became standardized and thus creates a good baseline for objective analysis.

About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects.  Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value.  For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.