When is the best time to buy or sell a company? Market sentiment plays a key role in this decision and should not be overlooked.
For publicly listed companies, market sentiment is often immediately avaiable. The value of companies with significant operations in Asia, for instance, is directly impacted when negative events occur in that region. Similarly, if developments in Asia outpace what European companies can achieve, the effects become evident. A current example is the rise of electric vehicles, where many Chinese companies are ahead of their European competitors, who struggle to catch up. This discrepancy is clearly reflected in the declining valuations of European car manufacturers.
Non-listed companies are also sensitive to market sentiment. This can be due to their operations in specific markets or because they serve as suppliers directly affected by the sentiment impacting their large customers. The openness of the Dutch economy means that global developments have a direct impact on Dutch companies, even those that operate only locally. Every business is part of the broader Dutch economy and cannot be isolated from it. Of course, not every economic event has the same effect on each company; this depends on the nature of the event.
There are numerous examples of how market forces influence company valuations and the volume of transactions. One of the most significant factors is interest rates. Many transactions are financed with external capital. When a company is acquired, its repayment capacity is assessed to determine how much can be allocated to interest and principal repayments. As interest rates rise, less money is available for repayment, which directly reduces the amount that can be borrowed. This, in turn, leads to lower company valuations, even if the company's core earning capacity remains stable.
Another important factor is expectations surrounding economic growth or contraction. Due to the open nature of the Dutch economy, it's not just domestic economic forecasts that matter, but also international ones, even for companies primarily active in local markets. Buyers of companies often calculate their return on investment over several years. If economists predict an economic downturn, investors may expect the earnings potential of the target company to shrink as well. In uncertain times, investors generally prefer not to extend their payback period, which puts downward pressure on business valuations. Government policies can also influence market sentiment, as seen in the current discussions about compliance with regulations surrounding self-employed workers (ZZP’ers).
It is crucial to consider market sentiment and short-term economic forecasts when deciding to buy or sell a business. We can provide you with the necessary guidance in this process.
Want to know more? At Schuiteman M&A Corporate Finance, we are happy to assist you with the purchase or sale of a company. Feel free to contact me.