Harvesting your wealth
Optimizing shareholder liquidity
When it’s time for a transition in your business, realizing an attractive investment return is often the goal. A healthy return on investment is the payoff for years of hard work, sacrifice, and financial risk—but assigning an actual value to your business can be a challenge. Explore this report, which offers information and insights on strategic liquidity alternatives.
- Transaction timing
- Economic influences
- Capital market signals
- Shareholder liquidity transactions
- The time to start
In the wealth-harvesting process, transaction timing can increase a private business owner’s wealth from a shareholder liquidity event more than any other single factor. Both macroeconomic and microeconomic factors can influence this timing.
Economic and political macroeconomic factors frame the assessment of enterprise value and the relative worth of the financial assets owned by private companies. The company’s performance, financial condition, near-term expectations, management depth, and business succession plans can significantly affect enterprise value.
The following shareholder considerations can make wealth harvesting even more challenging:
- Company legacy
- Family ownership continuity
- Employee and community loyalty
- Investment risk tolerance
Amid all these factors, determining which shareholder liquidity alternatives may yield the most benefits for private business owners typically requires experience, commitment, discipline, and favorable timing.
COVID-19 has disrupted the global economy and changed our understanding of the connection between the broader economy and the stock market. By the start of September 2020, the S&P 500, the index most attributed to the US economy, had climbed to an all-time high, while other metrics that track broader economic strength were raising red flags. The NASDAQ Composite is now up over 30% on the year, despite dropping over 20% during the height of the crash. From trough to peak, the NASDAQ has grown over 70% in just 5 months.1
As GDP fell 32.9% in the second quarter of 2020, many have begun to notice the disconnect between the overall U.S. economy and the performance of its underlying stock market. The value placed on liquidity, especially amongst large-cap stocks, is a key factor driving the increased demand that’s led to higher stock prices.
Worldwide economic turbulence stemming from the global pandemic has significantly impacted the U.S. This report dives into the pandemic’s effect on M&A, capital investment, forecasting, and other key factors that are important for middle market business leaders to consider when contemplating a transaction.
Contrarian to most economic cycles, the stock market has performed well despite looming economic warning signs, perhaps attributable to its sheer liquidity.
Capital market signals
Competition to complete deals has remained strong since 2013, leading to strong valuations among both financial and strategic acquirors. Financial sponsors are increasingly bidding up valuations as they seek returns for large amounts of capital they’ve raised. That said, the steady run up in U.S. middle-market M&A volume has waned in light of COVID-19, and as a result new trends have come about:
- Carveout and divestiture activity for middle-market private equity funds is on track to reach its highest level in six years.
- Deals closing in 2020 are increasingly equitized as lenders place higher scrutiny on underperforming businesses, cautiously underwrite, and increase pricing and LIBOR floors across the spectrum of their lending products.
- The decade-long boom in increased add-on deal activity has only escalated since the start of the global pandemic as tighter debt markets hinder capital availability for larger transactions.
Divestiture and add-on activity has increased in light of the stricter capital markets environment we are currently experiencing.
The time to start
Macroeconomic and capital market conditions in 2020 appear to be less favorable than in recent years as a result of COVID-19 and the upcoming runoff elections in Georgia to confirm the Senate. There are many considerations for a shareholder when thinking about a liquidity transaction—and transaction timing is key. If you decide to explore the many alternatives available for such a transaction, prepare yourself for an exciting but demanding process.
At the same time, if you leverage a disciplined transaction approach, along with the experience and resources of a well-regarded corporate finance adviser, you can address many of the risks that lead to surprises and disappointment. Such an approach can help you gain a clear understanding of what to anticipate from a liquidity event, choose a path that is likely to produce the ROI you expect, and gain insights into important decisions and milestones you’ll likely face on your path forward.
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