The last couple of years has been frothy for M&A. As far as disclaimers go, you would do well to remember that past performance is not indicative of future results.
This month we touch on the impact inflation, interest rates, disruptions in the supply chain and other economic variables are likely to have on your wealth gap.
What is the wealth gap? Read on to learn; why you need to understand it, how it has most likely widened and what you can do to mitigate the risk of losing wealth.
Dynamics that Matter in the Current Business Owner Marketplace
by: John Foster, MBA
The Wealth Gap is often defined as the short-fall between future needs and the ability of one’s current assets (business and personal) to meet those needs.
For most business owners over 70% of their wealth is locked in their business. Given the market’s recent hit to personal holdings how has that gap widened? Has the value of the business fallen? What impact will inflation, rising interest rates and a host of other uncertainties have on your gap going into 2023? What can you do about it?
These are critical questions and you aren’t alone in seeking answers.
Heading into the second half of 2022, we face more uncertainty. Notably, continued supply chain disruption, the war in Ukraine and upcoming midterm elections all of which impact the direction of the economy.
Exit or transition planning, relates all these real-world occurrences to business owners in an effort to mitigate risks and improve the likelihood of monetizing your business, on your terms.
The data shows 82% of business owners are not mentally prepared to step away and 64% are not financially prepared.
Trends for beginning the exit planning process, have moved from being emotionally driven (e.g. fear of tax increases) towards practical benefits (e.g. to increase liquidity, reduce risk, preserve wealth or to address health concerns). Having survived 2020, 2021 and midway through 2022, they are increasingly thinking to themselves, “I’ve got to diversify. I’ve got to protect my wealth.”
What the Numbers Reveal
In this very active market for business owners planning their exits, there is a wide array of potential outcomes. As of Q1 2022, the average sale price of a company was 6.7 times the company’s EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization). That’s an increase over the 6.1 multiple that we saw in 2021 and the 5.9 multiple that was the average in 2020.
That average number doesn’t tell the whole story. That’s because of the wide spread in sales prices for companies over the past two years. Putting aside the fact that most companies don’t sell or sell for far less than hoped for, it’s important for every business owner to understand that half the sales were above that multiple while half were below it.
The Time to Act: Planning Your Exit
Rising inflation and interest rates might be the most immediate concerns for business owners considering an exit. “If rising inflation and interest rates devalue my company how much more growth must I achieve to make up the difference? How long will that take?
As a business owner, there are still factors well within your control that add value, reduce risk and protect wealth. These factors lay at the heart of planning.
The bottom line is this: the wealth gap is real. Whether you are planning an exit in the near term or not, keep in mind that planning is a process. It’s easy to stay caught up in the idea of growing value and achieving ultimate success through a high-value sale, but that is not the fate of most businesses. In many ways, as the pandemic has revealed to us, the exit process is importantly about liberating yourself from your business on your terms to focus on the American Dream you’ve created.
Written By: John Foster
John Foster has 30 plus years of distinguished leadership and management experience with multiple companies at various stages of development across several fast-paced industries.
Learn more at pathfindergroupus.com