5 matters to consider when contemplating selling your startup: Part 1

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To sell, or not to sell?

It’s one of the most common debates we see here in our firm that happens to coincide with being an entrepreneur It’s part of the quintessential story arc of the entrepreneurship: Start, grow, sell. And it’s a lucrative prospect, particularly in Canada in 2019.

There are several reasons why a startup may choose to explore the option of selling, and those reasons can be broken down into two big categories: Internal reasons and external reasons. Today, in the first of a two-part series, we’re going to examine some of the external reasons why startup based tech companies typically begin thinking about the possibility of selling.

1) Rising Interest Rates
Interest rates in Canada are still relatively low, but could increase soon[1]. While we can’t predict the future, some entrepreneurs may wish to sell while interest rates remain low. The lower the interest rates, the higher the multiples. Higher interest rates could also result in a decrease in your company’s value, leaving you vulnerable to losses.

2) Bull Market
We’re currently in the midst of the 3rd longest running US bull market[2]. In the first quarter of 2019, Canadian listed stocks rose by 15.8% while the S&P also remained high. Strength in cannabis stocks, retail sales, and oil prices have kept the upward trend moving, though there are no promises for the future. While the current market favours sellers, there are no guarantees that the market will remain the same into the future.

3) Record Stock Buybacks
Since Donald Trump signed the Tax Bill, stock buybacks are at an all-time high with companies announcing more than $170.8 billion in such transactions[3]. Strategists from JP Morgan estimate there is a 51% increase in buybacks since last year. They also predict that companies will continue to buy back shares through 2019; a trend that places tech companies in the lead with an estimated excess of $70 billion worth of buybacks.

4) Increased Debt Post-Recession
In the years following the financial crisis of 2008, global debt has increased by $57 trillion[4]. Particularly within G7 nations, personal, business, municipal, provincial, and federal debt have all risen. This benefits sellers for a couple of reasons. Firstly, it normalizes debt and makes it less of a hindrance to the attractiveness of an investment. Secondly, it allows companies to provide a small discount on their purchase price to offset the debt, while still enabling the seller pay the debt off with the sale. That being said, it’s important for sellers to understand what happens to their debt when the business is sold.

5) Inflated Commercial Real Estate
In 2017, the Canadian market set a record with more than $43.1 billion invested in commercial real estate. Downtown office vacancies in Toronto hit a low of 3.7 percent, increasing buyer demand. Further, the tech industry has been fueling leasing activity, accounting for 27%[5] of the big deals signed in Q2 of 2018. As a result of this trend, technology-enabled spaces are particularly desirable. In considering a sale, the real estate market conditions play an important role in how your assets will be affected.

Ask our trusted business advisors
There’s no denying that we’re sitting squarely in a seller’s market. But as baby boomers begin to sell, the market could shift to less favourable conditions. It’s never a bad idea to consider all the options for your business, particularly when the market conditions are right. At Zeifmans, our trusted business advisors have decades of experience facilitating successful and lucrative business transactions, and assisting our clients in making the right decisions for their financial future. Reach out to us today to learn more.

[1] CBC, “Bank of Canada Holds Interest Rate Steady, Hints Low Rates Could Stick Around”, https://www.cbc.ca/news/business/bank-of-canada-rate-decision-1.5108747

[2] CNN Business, “Bull Market is 3rd Longest in U.S. History”, https://money.cnn.com/2015/05/06/investing/stocks-market-3rd-longest-us-bull-market/index.html

[3] CNBC, “Companies Buying Back Stock at Record Pace Since Trump Tax Bill May Aid Market’s Comeback”, https://www.cnbc.com/2018/02/15/companies-buying-back-stock-at-record-pace-since-trump-tax-bill-may-aid-markets-comeback.html

[4] The Guardian, “Global Debt Has Grown By $57 Trillion in Seven Years Following Financial Crisis”, https://www.theguardian.com/news/datablog/2015/feb/05/global-debt-has-grown-by-57-trillion-in-seven-years-following-the-financial-crisis

[5] PWC, “Property Type Outlook”, https://www.pwc.com/ca/en/industries/real-estate/emerging-trends-in-real-estate-2019/property-type.html – office