Sell Technology Business in 2018 For Peak Multiples
If you are thinking about selling your technology business, 2018 is the perfect year to take action. The current trends of rising interest rates, a market that strongly favors sellers, and peak valuations across all asset classes are just a few reasons why you should sell your technology business in 2018. Ready to learn more? Here are just some of the reasons why 2018 is the ideal time to sell your tech company.
Rising Interest Rates
Interest rates are still relatively low, but they might not stay low for much longer. Consider this: the Federal government increased the interest rate three times in 2017 and more increases are expected this year. In fact, many market observers believe interest rates hit their lowest levels in 2016 and that they will only continue to rise.
The current low interest rates are a great reason for you to sell now, because the higher the interest rates, the lower the multiples. Higher rates could result in a decrease in your company’s value and leave you vulnerable to losses. If you are thinking of selling your technology company, seriously consider selling it this year before interest rates rise break out to the upside.
10 Year Bull Market
We are currently in the midst of the third-longest running bull market in US history, which promotes buying and is extremely favorable to sellers. The Dow Jones Industrial Average jumped 260% since March 2009, and if the bull market continues into August, it will become the longest in history.
But a closer look at Dow Theory indicates that the bull market is vulnerable and could change unexpectedly. The current bull market still favors sellers, but the trend could shift without much warning. If you are considering selling your tech business, you should do it now while the market is still favorable to sellers.
Record Stock Buybacks
In 2018, stock buybacks are at an all time high, with companies reporting $170.8 billion since President Trump signed the tax bill. Strategists from J.P. Morgan estimate there is a 51% increase in buybacks since last year. They also predict that companies will buy back a record number of shares in 2018, with tech companies leading the way with an estimated $69 billion worth of buybacks. It is important to note that these buybacks have taken 100s of millions of outstanding shares out of circulation with the use of debt. Share buybacks only occur when conditions are good often signaling a top in valuations.
Buybacks Create Very High Price to Earnings (P/E Ratio) for Public Companies
Another reason 2018 is a great time to sell is that Price to Earnings ratios are very high for public companies as a result of significant share buybacks using newly issued debt. P/E ratios generally represent a stock’s current price compared with its earnings over the previous year. They tell us how much investors are willing to pay per dollar of earnings for a business. They also measure a company’s past performance and consider market expectations for the company’s growth.
When a company’s P/E ratio is high, this indicates that the market is expecting good things from it over the next few months or years. This means it is an ideal time to sell your business now, when P/E ratios are extremely high.
Significantly More Debt Since the Recession
Since the Great Recession hit in 2008, debt has increased greatly in most G7 economies, including the United States. World debt is much higher than it was in 2008, including personal, business, municipal, state and federal debt.
This could actually benefit sellers, since most of the time buyers will buy companies with significant debt because they are getting them for discounted prices. This typically means that the seller can cash out and let the new owners worry about paying off the debt. At the same time, it is important for sellers to understand what happens to the debt when they sell their business.
There are two main types of sales, stock sales and asset sales. In a stock sale, the buyer assumes all assets and liabilities of the company, including debt, while in an asset sale only certain assets and liabilities are transferred. Make sure you are aware of the type of sale you are undertaking and what it means for your business debt.
Inflated Commercial Real Estate
This probably won’t come as much of a surprise, but the price of commercial real estate is inflated and just keeps going up. This is true in much of the country and is especially dramatic in Seattle, which used to be an affordable place to rent. The cost of Seattle’s office space has increased 31% in the past three years, which makes the city more expensive than Los Angeles and Chicago.
What does this mean for selling your business? If you are located in a major city like Seattle where the cost of commercial real estate is high, this is quite the advantage. It means you are very likely to command higher rates if you sell your company now.
Limited Office Space in Seattle
Seattle has been in the news quite a bit these days, especially when it comes to commercial office space. The fact is, Seattle currently faces a shortage of commercial vacancies. The vacancy rate is estimated around 5.8%, which translates to fewer vacancies than New York City or Los Angeles. A big reason for this is the migration of tech giants into the Seattle area.
This shortage of office space can work in your favor if you are looking to sell your business. Many buyers consider it desirable to purchase a company that already has an established office space.
Assets in All Categories are Priced at Very Low Interest Rates
In the current market, assets in all categories are priced at very low or zero percent interest rates that can only go down as rates rise. When interest rates rise asset prices are likely to fluctuate widely, and assets are also worth more at a lower interest rate. If you are looking to get out of the business, it is worth selling as soon as possible, when the interest rates remain historically low.
It’s a Seller’s Market
Another reason why 2018 is a great time to sell is that buyers currently out-number sellers, making it a seller’s market. Quality, profitable business are still in high demand, but this trend will change as baby boomers begin to sell.
The baby boomers own approximately 66% of small to mid-size companies, and when they begin to sell en masse, there will be a surplus of businesses for sale. The market will then begin to change to a buyer’s market. The bottom line: take advantage of the seller’s market while you still have the chance!
To Sum It All Up
These are some of the most important reasons why 2018 is a perfect time to sell your technology business. When all these factors are taken into account, they create a situation that is extremely favorable to tech owners looking to exit their technology business. If you are thinking about selling your company, now’s the time!