Written by Brad Shaw.
When it comes to the state of the market, many have been referring to 2024 as a ‘Goldilocks’ year which feels like a good way to put it. Things aren’t too hot or too cold, they’re just right. But, what does that actually mean? Is 2024 a good year to sell your business?
Firstly, let me say that the performance of your business and the interest in your industry are by far the two most important characteristics that will impact on your company’s valuation. The best time to sell your business is always when you are running a healthy, growing and well-run business that is growing faster and making more margin than your competitors.
Having said that, if we think of the current market dynamics as the “tide” that might improve or discount your valuation. Then understanding those dynamics matters.
To start this discussion, we should look at the fundamentals or what the market is telling us.
What do the market fundamentals tell about 2024?
When looking for guidance from the market about company valuations to sell your business, the best place to start is by looking at listed company valuations and recent transaction valuations. Other macro-economic pointers, particularly in the last few years, include inflation, interest rates and GDP growth.
Conventional logic would tell you that as interest rates go up, valuations would go down, and we have seen that over the last year. The inflationary pressures we have endured over the last two years have encouraged Central Banks to raise interest rates leading to an increase in the cost of capital, as well as greater uncertainty about GDP growth and recessions. Business confidence, which raised the hurdle rates for buyers and therefore reduced the number of buyers, has impacted valuation negatively.
If we take that logic forward to 2024, the census view is that inflationary pressures are still there but not growing as they did in previous years. And, in Australia at least, interest rates, are at or near their peak and are expected to be steady or slightly lower through large parts of 2024. As this environment has been evolving, the listed company valuations have been steadily increasing. We would expect this to continue in 2024.
Stability is driving business confidence
The fascinating thing about economics is that fundamentals aren’t the only factor impacting the market. Sentiment is also very important.
The COVID and post-COVD era has been a study in navigating unchartered waters. The economic challenges that COVID gave us, and the raft of unprecedented financial measures taken to respond to it, has made it difficult to predict confidently where the market is going and why.
This has led to a period of uncertainty which has negatively impacted valuations. People know what to do in an up market and they know what to do in a down market, but when you aren’t sure if you’re in an up market or a down market things get a lot harder. We have seen that manifest in some buyers withdrawing from the market until the signs are clearer. Buyers who are in the market have been more risk averse and cautious when selecting targets, making offers and conducting due diligence. All these factors reduce the competitive tensions for buyers, drag out deal durations and lower completion rates.
So, with the market predicted to stabilise in 2024, we can expect buyers will feel more confident about economic conditions resulting in more buyers back into the market, more competition and slight improvements in valuations.
What are the chances things go backwards?
As we all know. There are no certainties in this world. Whether it be an oil shock, a civil war, a geopolitical event, a shift in technology, a pandemic or a global environmental imperative. There is always a chance of a major global economic shock or black swan event. This is obviously something that we can’t opine on, however it would be fair to say that this kind of event is not currently being factored in to the market data we are reviewing.
2024 – the year of the “rising tide”
So, in summary, the macro-economic data suggests that 2024 is a time when conditions are conducive to improving valuations and a “rising tide”. The Goldilocks year if you will.
While there’s no evidence that things are about to boom, it’s likely to be a time when good businesses in good markets are attracting strong multiples. So, if you feel you have your business sale ready and in a market that is attracting interest from trade players and financial investors, 2024 might be a good time to consider a sale process.
Take a look at our latest sector dashboards to find out more about business valuations in your industry.
