Market conditions and a favorable outcome should outweigh perfect timing
In 1991, Hurricane Grace collided with a low pressure system off the New England coast to create a meteorological rarity—two historic storms clashing together in perfect conditions to create the storm of the 20th century. Author Sebastian Junger, who immortalized the storm in a bestselling book The Perfect Storm, wrote: “The waves generated by the storm were so huge that they literally shook the earth; seismographs in Alaska picked up their impact 5,000 miles away.”
Business also has its stories of perfect storms, when market conditions and business strategy intersect at just the precise moment to maximize value and return. However, they are equally rare and hard to document. The reason: business is cyclical, and even the best economic forecasters do not know when a market is at its top or bottom. This is especially true in the construction materials industry.
According to National Ready Mix Concrete Association (NRMCA) the construction materials industry experienced four complete up and down cycles between 1975 and 2010.The four expansion periods ranged from three to ten years, with an average duration of 5.6 years. The four contraction periods ranged from one to five years, with an average duration of 3 years.
Today, the industry has been in an expansion period that has persisted since 2011, a period of 5.7 years. This is greater than the average expansion period of the past four cycles, so the question is not if the current expansion will reverse but rather when will it reverse…and whether or not trying to perfectly time the sale of your business is a sound strategy.
Are we already seeing signs of slowing growth?
Industry economists at organizations like Portland Cement Association (PCA) and McGraw-Hill (formerly known as FW Dodge) are indeed beginning to issue forecasts that show slowing growth and/or outright contraction of shipments in the industry. However, current conditions in many U.S. markets remain strong, with volumes, sales and profits up in 2016.
The last time we experienced such inconsistency between forecasts and a scarcity of markers that indicated an imminent slowdown was a decade ago. At that time, industry economists began forecasting a notable pullback, as producers were enjoying the final leg of an unprecedented building boom. Many producers, including several in my home state of Florida, ignored those economic forecasts and continued to ride the boom, spurning exit opportunities from 2005 through 2007.
Unfortunately for those who missed the peak, the Great Recession followed, triggering a five-year downturn in the ready mix industry that ultimately caused the demise of many independent ready mix producers.
Is it time to consider an exit?
If you’re wondering if the timing is right to sell, the answer is maybe. Remember, perfect is elusive. So the more relevant question to ask is, “what conditions need to be present to attract buyers and investors interested in ready mix?”
The following are three things to look for:
- Significant equity and debt capital available to fund acquisitions at favorable rates.
- Current market conditions need to be strong.
- 18 months of visibility into future market growth potential.
Each of these conditions are met by today’s market. In fact, in the southeast and Florida, market conditions are particularly strong. Not surprisingly, more investors and buyers are seeking to acquire ready mix companies now than at any time in the past eight years.
When the above three conditions exist, seller earnings tend to be strong, and buyers tend to pay healthy multiples. However, if market conditions turn, seller earnings tend to soften and buyers tend to pay significantly lower multiples. This is why it is much better to sell six months too early than six months too late.
Is it the right time for you?
Market conditions, like weather patterns, can provide us with valuable data—data that can and should inform our decisions—but it’s impossible to forecast the perfect storm. So the question of if now is the right time to sell is very unique to your individual situation. It is a question only you can answer, and it depends largely on what you believe about the future of your market. However, know two things. First, you don’t need to go it alone. There are many qualified professionals who can help you understand the market and help you prepare your business for maximum earnings through a sale. Second, there is a penalty for being late. Don’t wait for perfect, because if you miss it, you’ll be on the wrong side of the curve.