One of the most important concepts we examine in our Growth and Exit Planning Conferences is properly timing your exit. Now of course a number of factors impact your timing, many of them very personal to you. Health, family relationships, retirement and many other aspects specific to you and your exit come into play.
But you also need to analyze macro-economic issues that also could have a dramatic impact on your exit planning. Two of the most important being inflation rates and their corresponding impact on interest rates. The two go hand in hand and if you are not factoring them into your exit timing, you really need to because most economists expect inflation to become an issue which will cause the Fed to eventually raise interest rates to control it.
How do these two issues impact your exit timing?
Since most M&A transactions of any size have a component of the purchase price financed, as the cost of capital goes up, the amount you will pocket goes down. Of course I am oversimplifying it a bit, but the truth is that as inflation begins to rear its ugly head (which it already has in many parts of the country as we come out of the pandemic), the Fed will be forced to raise interest rates in response. In fact, a recent article in the Wall Street Journal put it this way:
Federal Reserve officials signaled they expect to raise interest rates by late 2023, sooner than they anticipated in March, as the economy recovers rapidly from the effects of the pandemic and inflation heats up. Their median projection showed they see lifting their benchmark rate to 0.6% from near zero by the end of 2023. In March they had expected to hold it steady through that year. The Fed’s change in tone and new forecasts were “a wake-up call to the market” about the central bank’s likely response to higher inflation.
Now the good news is that the end of 2023 is a ways off. The bad news is that since it takes 9-15 months to close a deal with a premium buyer, business owners need to start taking a long hard look at their exit timing in order to beat any Fed interest rate increase.
Again, we know there are lots of other personal factors that you have to consider in your exit timing. Many of these are critical to you and your timing. But as you consider them you also must reflect on the impact of interest rates on the amount of cash you take with you post-close.
Time and space do not allow us to cover all your timing issues here. However, a great place to learn more about how timing is important is at our Growth and Exit Planning Conferences. While there not only will you learn a tremendous amount about timing your exit efficiently, you will also have a chance to speak and meet with our exit planning professionals. This will allow you to confidentially discuss your specific timing issues and further delve into what timing might be best for you.
If you are interested in learning more about our conferences, please use the following links and be sure to closely follow the Fed’s future announcements regarding interest rates:
Carl Doerksen is the Director of Corporate Development at Generational Equity.
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