You don’t need a crystal ball to know that 2018 is a great year for a transaction. Simply look beyond your company’s daily grind and see the conditions currently taking place just outside. With this shifted focus, begin to ask yourself the pertinent questions necessary in any great business decision. Then, prepare your map. Better than any fortune teller, a reliable roadmap will guide you through a transaction and successful 2018.
This year continues a window of opportunity giving business owners the ideal timing for a financial event—an acquisition, a merger or partnership, a sale, or any hybrid thereof. We believe this will last through much of 2018. Beyond this, however, things become quite murky. Here are the reasons behind our thinking:
- A Strong U.S. Economy and World Economy. As the United States nears full employment and continues to see increasing growth since the Great Recession, it is important to note that we aren’t alone in this progress. Across Asia and Europe, there is not only a lack of economic crisis and drag, there is forward momentum. This period of world expansion is expected to continue through 2018 and into 2019.
- Equity Markets Broke Records Through 2017. It is one of the longest running bull markets in United States history. Questions about the run’s sustainability and legitimacy have accompanied this market since the Great Recession. This skepticism has kept certain investors sidelined and is a contributing factor to the markets longevity.
- 2017 Corporate Tax Cuts Find CEO Consensus. Everyone is curious what the effect of these cuts will be as it is still too early to fully understand their benefit and cost. However, there is overwhelming belief that U.S. businesses will experience growth from tax savings and bottom line increases. This will lead to investments in capital projects and strategic acquisitions. Further, this lucrative landscape is expected to cause foreign investment to flow in, and global companies to increase their U.S. footprint.
- A New Federal Reserve Chairman. This year could see as many as 4 rate increases depending on how well the economy performs. However, with a new head leading the Federal Reserve, could there be a change in the theme of moderation and measured effects based on job growth and inflation? Expect to see a rise in the cost of capital with any rate increase. How will this affect global liquidity levels? And, will inflation finally wake up this year or next?
- Signals. There are several other indicators needing attention: the bond market, the treasury yield curve, the credit cycle, business debt levels, etc. Are the signals we are seeing merely technical at this the 10th year anniversary of the Great Recession? They are not loud enough to draw panic; however, they do need analysis and discussion in the days ahead.
- 2018 Is an Election Year. In the United States’ tumultuous political environment, no one can say what the 2019 landscape will look like. As politically divided as this time is, it throws a significant amount of uncertainty into 2019.
In view of these, 2018 presents a favorable year for your business to consider a transaction. What shape it takes, and its success, depends on the actions taken now. Your roadmap starts with one of the most important factors of any financial event—timing. We are frequently asked, “is now the time to acquire a business?” “How will I know when to sell?” “Should I be thinking about a partnership or merger to mitigate my amount of risk?” Our response always leads to a discussion on timing and the risk involved for business owners and stakeholders.
Timing is critical for any transaction due to the numerous factors involved inside and outside your business. Due to this, it is quite common for paralysis to set in and hinder the decision-making process. This can cause a bit of star-gazing to vet out whether conditions are aligned for the perfect transaction. But it doesn’t have to be that complicated. First, determine where you are starting from by gaining a clear understanding of your company’s historic growth rates, future pipeline, customer makeup, and contract expirations. Next, recognize and appreciate the business’ surroundings which are the industry and economic regional/national/global trends currently taking place. Finally, take all this knowledge and put it into a thoughtful and reasonable action plan.
The path forward is this year. Market conditions continue to be favorable, but for how long, no one can be certain. A successful transaction is within reach with the proper planning. And it is never too early to start. Begin by considering the following:
- Be Prepared for a Transaction. No matter the type of event you are considering, being prepared means that you are running your business in such a way that it can continue to grow in value through any trends in your industry or economy. And it can do so well into the future.
- Come from a Position of Strength. Take the example of a sale: this is not to be considered a resignation, but rather a successful product that you have worked toward. Too often our path is chosen for us due to an economic downturn, health reasons, or fatigue and burnout. These forces instantly place an owner and stakeholders at a disadvantage. However, a healthy understanding of market conditions means knowing that strategic buyers and private equity groups in your industry are looking to spend cash on valuable investments. This means there is greater potential for favorable conditions and terms, and is an instant factor to add to your position.
- Know the Questions of Your Transaction, and Find and Understand the Answers. Are you looking for a change? Are you wanting to mitigate risk or diversify assets? What are the impacts to your wealth plan? What are the most important factors of your event—cash investment, price, earnouts? Who will handle the transaction? Answers to these questions will allow you to assemble the right team including M&A advisor, accounting, and legal counsel. They will help you understand your answers as well as your best path forward.
Don’t let this window of opportunity come to an end before you’ve prepared. The circumstances that brought us to 2018 will eventually change. Cash, while plentiful now, is certain to become more expensive with borrowing rates increasing and values diminishing. The last thing you want is to start off the next downturn with little thought to your plan. Start now, prepare now, take action now, and reap the reward of a well thought out transaction. The road is waiting. We are ready, are you?