As the economy grows, companies also want to grow and expand. This is an interesting phenomenon, where due to the fear of missing out, there is a need to grow significantly more than the company's current growth curve allows. In this case, one way is to acquire new customers, products and/or access to a new market through the acquisition of a competitor or partner. This often makes sense because it can be the cheapest and fastest way to expand.
Economic growth not only puts pressure on psychological expansion, but also provides the means to do so. Companies that want to expand either have sufficient funds of their own or are very creditworthy in the eyes of banks that also want to expand (lend out more money).
This is all good for an entrepreneur who wants to sell their business. As the economy grows, there may be more buyers than suitable offers on the market. This makes the business to be sold more liquid and raises the selling price.
Economic growth does not automatically lead to the same level of interest in acquiring companies in every sector. This does not mean that it is not possible to buy and sell companies in a particular sector, but that it's simply not the best time to sell. However, there are some attractive sectors, and there will probably be more sales transactions done with companies in these sectors next year.
The attractiveness of a sector is mostly affected by the expected profitability of the companies operating there. Of course, it is possible to calculate these expectation, which many often do, but it is still a prediction. Therefore, it is good if enough information is available on the financial results of previous periods to support an ambitious forecast. The industry, which has been stable and profitable both yesterday and today, is certainly attractive. Selling in conditions of economic growth adds to the psychological leverage that the future will be even better. Whether it will or not, it certainly speaks in favor of a higher selling price.
The attractiveness of the sector is also affected by a number of factors that also affect the sales price of the company operating there. The future value of a company, i.e. the selling price in this context, is also increased, for example, by any positive legislative change or the general growth potential of the sector. However, these factors can also lower the sales price. A good example here is the impact of raising and lowering excise duties on the financial results of affected companies. While the impact of legislative changes can be more or less calculated, the assessment of the growth potential of a sector can sometimes be based simply on the popularity or unpopularity of the sector. Needless to say, selling would make sense if the industry is popular.
In addition to the economic environment and the sector, the price of a particular company also depends, of course, on its own performance. Regardless of the type of company, the pricing logic is the same - the more credibly the high future value of the company is justified, the higher the price that can be asked is today. It is definitely easier to do this for a company where the price expectation is confirmed by the performance of both today and the previous periods.
Of course, there are a number of other nuances that can affect the selling price of a particular company. We have covered the topics of what a company's value depends on and how it is calculated in our previous posts:
However, it is clear that during economic boom, it is a good time to sell a business. This is especially the case if wage pressures and rising input prices could have a negative impact on future profits.
Bank of Estonia forecasts economic growth of 8% in 2021, which is an alarming number. However, the rapid growth is passing, due to global supply chain problems, a shortage of free labor, limited production resources and exceptionally fast price growth (read more on Bank of Estonia's website).
The economy will continue to grow in 2022, but it will no longer boom. Maintaining existing profitability will therefore be an increasingly difficult task for the above reasons. Thus, the economic environment is favorable for the sale of the company, and those who have been waiting for it so far could start implementing their plan.