Market activity is one of the most important factors to consider when deciding when to sell a company.

Market activity is one of the most important factors to consider when deciding when to sell a company. When the economy is healthy, there are more buyers, who can afford to take on more debt, all of which translates into a more rapid sale at a higher price, generally.

Favorability of Market Conditions
The favorability of market conditions for transacting the sale or acquisition of privately-held companies is largely a function of a few key factors:

• Availability and cost of debt to finance a portion of the transaction
• General condition of the overall economy and its likely effect on the industry(ies) in which the company operates or to which it sells
• Availability of qualified, funded, motivated buyers
• Availability of solid companies to acquire
• Debt Availability

Buyers, whether high net worth individuals, corporations or private equity investors, depend on the availability of debt to fund acquisitions. Seldom are companies purchased with a 100% equity investment.

The current difficulty in the mortgage market, which is likely to continue well into 2008, has reduced the availability of debt to fund the mega-deals discussed in the daily newspapers. There have been recent news stories about some very large deals cancelled in process, due to new contstraints on debt availability. So far, there has not been tightening of debt availability to fund the acquisition of middle market companies or small businesses, and this is not anticipated unless the entire economy takes a signficant downturn. Even then, there will be plenty of capital to invest, it just may come with more contraints and at a higher price.

If interest rates rise, debt will be more costly to acquirers, resulting in an unfavorable effect on cash flow to service it, and reducing the amount of money that acquirers can borrow.

General Economic Conditions
According to approximately 50 economists polled by the National Association for Business Economics (NABE) in November, 2007, “While the U.S. economy faces a higher risk of recession from credit markets, housing, and energy prices, NABE’s panelists still do not see recession as the most likely outcome,” said Ellen Hughes-Cromwick, NABE president and chief economist at Ford Motor Company. “Our panel of forecasters sees growth gradually picking up from the sluggish pace projected for this quarter even without further easing by the Federal Reserve.”

If you are interested in free, monthly updates on the U.S. and global economy, please sign up for the Tranzequityeconomic report. As a NABE member, we can access the full report not available to the public, and excerpt this information for Tranzequity economic report subscribers.
Availability of Buyers and Eligible Companies to Acquire
Typically, there are more buyers than good companies eligible to be acquired, and there is no current exception to that rule. We receive communications from numerous buyers weekly seeking to purchase companies of many types, from software to heavy manufacturing and distribution.

In summary, the market remains favorable for lower middle market and small business transactions, though if the overall economy slows, many companies that may be attractive acquisition targets today may become less so.