The pundits would have you believe deal making has all but dried up in this dismal, credit-starved economy. Take a closer look, though, at the market for smaller companies and the picture isn’t so dire.

According to Thomson Reuters, the dollar value of all mergers and acquisitions in the U.S. totaled $1.1 trillion through Nov. 30, 2008–a painful 30% drop from the same period just a year earlier. Yet while overall volume is down, the number of transactions worth $100 million and below have held up.

The Deal Pipeline estimates that the number of deals in that range during the first three quarters of 2008 increased by 15% over the same period in 2007. And valuations, while down slightly, have held up reasonably well relative to transactions involving larger firms.

Reason for this resilience: Smaller companies still fuel the growth of larger acquirers. Moreover, many of those smaller firms are privately held–meaning that there’s less pressure to choke down a modest valuation to appease antsy shareholders.

Should You Sell Your Business? Some Factors to Consider

Why sell? The reasons run the gamut–succession issues, estate and tax planning, the threat of deeper-pocketed competitors or just the simple exhaustion of managing a business. The key is understanding your options.

• Start with who’s buying. There are two major types of acquirers: strategic buyers and private-equity players. Strategic acquirers tend to be larger companies that would rather simply bolt on a fully formed business or product line than build it from scratch. Some may be willing to pay dearly for the chance to instantly increase their market share or snag a proprietary technology. Such a sale may mean handing over the keys to the business entirely.

• For entrepreneurs who want to stay on but hedge their bets from a valuation perspective, a sale to a private equity shop may make sense–especially if the business is intended to be a new platform for a larger entity the PE shop has yet to piece together. In these deals, the entrepreneur often is left with a minority stake (that’s the hedge). With any luck, the PE shop unloads the business five years later (or maybe longer in this environment) and the entrepreneur gets a second bite at the apple.

• Prepare to be creative and flexible with the financial structure, especially with private-equity buyers. For a feel of your options, consider a theoretical company with $25 million in annual revenues and no cash or debt on its balance sheet. Say a private equity player bid $30 million for it, while a strategic buyer bid $33 million.

OPTION A. The seller accepts the strategic buyer’s $33 million, all paid in cash at the closing. Clean and neat–which things rarely are.

OPTION B. The seller agrees to a $30 million valuation from the PE investor. The deal includes $20 million paid in cash at closing; a $10 million note (meaning the seller is helping to finance the deal, but that his position in the new capital structure is subordinate to the bank that financed the deal); and an “earn-out” based on the company hitting certain milestones during a specified period of time worth perhaps another $8 million. If all goes well, the deal is potentially worth up to $38 million (excluding the time value of money effect).

OPTION C. The seller agrees to a $30 million purchase price, broken down as follows: $20 million in cash, a $10 million note–but instead of the earn-out as in Option B, the original owner gets to re-invest with the new equity investors at the same cost of equity. Without getting into the math, the point here is that the seller gets the benefit of the buyer’s access to cheap financing (which there isn’t much of right now). That way the seller might reap a windfall on the future equity value of the company.

OPTION D. Seller takes $25 million in cash at closing, along with the right to retain certain intangible assets, real estate holdings and intellectual property agreements–and the future income streams they kick off. The permutations are myriad. Just remember: No matter what route you choose, shop around. The more suitors you attract, the higher valuation you’ll get.

Eric Lomas, president, and Sharif Tanamli, a managing director, at HT Capital Advisors, LLC, an investment banking firm, are focused on middle market merger & acquisitions and advisory services. HT has its origins dating back more than 70 years as Hill Thompson Magid and currently has offices in New York and Chicago and representation in Paris and Boston.

Should You Sell a Business When the Economy Is Down?

Whenever negative economic news grabs the headlines, business owners are inclined to believe that it is not a good time to sell their company and that they will have to put their retirement plans on hold. While this rationale makes sense for some, waiting for better economic times does not necessarily equate to a higher value when the business is sold.

The reality is, in many instances, the business value declines during this delay because the owner is not as energetic and gung ho as in previous years and the business starts retiring before the owner does. 

This usually results in less revenues and a lower bottom line. Consequently, the business owner can lose several years of retirement yet not add any additional value to their net worth.

The sale of a profitable company in this environment is a viable strategy for business owners who are ready to sell. Quality sells in any economic environment and profitable businesses that are properly positioned are still in demand.

Current economic conditions will most likely continue for the immediate future. We find that despite the credit crunch and economic turbulence, however, there is not a significant slow-down in buyer inquiries. Our observations are as follows:

• Strategic buyers and Private Equity Groups are plentiful and are looking for quality acquisitions.
• Management-level individuals who have experienced corporate layoffs who are typically baby-boomer age, have severance pay or 401Ks to invest, and are looking to go into business for themselves. The stock market, or putting money in the bank, do not look attractive to these corporate refugees at this time in their lives.
• Blue collar workers who have been laid off are also looking to “buy a job.”
• All buyer groups are looking to Houston because of its economic position as #1 in the U.S.

Since the business value for most owners accounts for about 75% of their net worth (Business Brokerage Press 2007), this is an important financial issue where time is of the essence. For many business owners, the best strategy to enhance their wealth upon exiting their business is to improve value and not put their life on standby while waiting for the economy to turn around. 

The following are 10 elements common to every business that improve value in the marketplace. Some are quite easy to implement with little effort or expense. In preparing your business as a quality acquisition opportunity and maximizing its value, the following recommendations are fundamental to achieving that goal.

10 Elements that Can Improve Business Value in the Marketplace

1. 1. Spruce up the facilities and check equipment to ensure good working conditions. Curb appeal makes an impression. A clean, organized facility gives a good feel for how the business is run.
   2. Compile a list of furniture, fixtures and equipment along with applicable service records. This shows a prospective buyer that the company is well maintained.
   3. Read your lease. Is it transferable? The landlord may need to approve new ownership before signing off on the lease transfer. Unfavorable lease terms can detract from value or hinder the sale altogether.
   4. Streamline overhead and operational expenses to get the highest value. This can include divesting underutilized or obsolete inventory, assets and employees.
   5. Minimize the business dependency on you, the owner. Delegate more to key employees or managers who would stay on board under new ownership. A business with well-trained employees who can run daily operations is more appealing than a business that is highly reliant on the owner’s presence or is dependent on the owner’s personal relationships with customers. Buyers do not pay a premium if the business relies on the owner for its success.
   6. Document how the business is run. Records and procedures make buyers more secure and confident that your success can be continued. Organize, document and update the following: training procedures, employee contracts and handbooks, job descriptions, policy manuals and operating procedures, mission statements, strategic plans, Internet presence, brochures, press releases, marketing campaigns, and customer lists.
   7. Review your accounting processes. Are income statements and balance sheets well prepared and clean? Are you driving all income to the bottom line? Accurate financials add to a buyer’s comfort level and will likely result in a higher sales price. Trends in accounts receivable and payable show whether or not you have good customers who pay on time. Be on the ball in contacting slow-paying clients. This shows better credit management, follow-up and attention to detail. Seasonality of cash flow and concentration of the customer base are also underlying factors that affect value.
   8. Make sure patents, trademarks and other intellectual property rights are properly registered.
   9. Clean up any outstanding legal, financial, or tax issues.
   10. Be advised of and prepare for the questions that prospective buyers will most likely ask.

Strike While The Iron Is Hot: Now Is A Great Time To Sell A Business

Takeaway: Internal and external factors are important considerations when selling a business. Here are issues you should think about when trying to time your exit.

There are many factors that determine the best timing for selling a small business — the financial condition of the company, valuation, growth cycle, profit history, and the current market.

Usually the best time to obtain the highest price occurs when sales and earnings are good and trending upward. A solid earnings trend will enable a buyer to pay a higher price and still meet his return of investment criteria. A history of good performance also gives the buyer confidence in projected future earnings.

Value is dynamic and proper timing makes a big difference in the prices paid for business acquisitions. External factors such as the economy, industry trends, competition, stock market volatility, investor confidence, interest rates, and geopolitical considerations are cycles of constant change that impact value.

Internal conditions within a company also change. Often in combination with external factors, sometimes independent of those factors. Changes do, and will, occur and they always tend to impact business value — sometimes eroding value and sometimes increasing value.

Timing the Market for a Business Sale

So how should you start thinking objectively about the best time to sell?

A good visual of right-timing would be to imagine the life cycle of your business plotted as a bell curve with the peak being the top of the growth cycle. The top is when you have reached the flat plane of growth…a sustaining mode. Buyers pay the best prices when they can’t see the top, when the curve is still climbing upward. Once the top is visibly breached, buyers may pass on the opportunity or may pay prices based on a downward trend and a higher risk factor.

If you wait until your revenues are already sliding over to the downside of the bell curve, you have waited too long. Your business has already started to retire before you have. To get the best deal you have to sell on the way up.

A Vibrant Acquisitions Market

Markets change and fortunes change from year to year. The 2017 market was a record-breaking year in the number of businesses purchased in the U.S. It is predicted that 2018 could truly be historic for small business and may be the selling opportunity of a lifetime for business owners ready to sell.

Buyers in every category (private equity, strategic / synergistic buyers, investment groups, executives, and first-time buyers) are hunting for good opportunities. There are more buyers by far than available businesses on the market.  

Small & mid-sized business owners looking to sell and retire are getting good prices for their companies even though they are not spending a lot of time preparing their companies for sale.  It’s always a good idea to strike while the iron is hot, while favorable conditions exist in the business-for-sale marketplace.

Buying or Selling a Business During Tough Times

With negative economic news grabbing the headlines in the United States, business owners may think it is not a good time to sell their company. But fortunately for owners looking to sell, that is not necessarily true.
Business sales are still taking place with sellers capturing attractive prices and favorable terms, when the deal is structured properly.

One of the most important foundations of constructing a successful deal has always been a solid buyer, one that is creditworthy. Whether it is an individual, another company, or a Private Equity Group, qualifying criteria are demonstrated business acumen, significant assets to pledge as collateral, or a committed fund behind them.

With a proven, credible buyer at the negotiating table, lenders are more likely to support the transaction.

In today’s environment, some seller financing should be expected to get the deal done. It is not uncommon during a tight economy that sellers must share the risks with the buyer and the lender in order to achieve the highest value.

Therefore, now, more than ever, it is in the seller’s best interest to find the right buyer. This has resulted in the advantage going to buyers with a strong balance sheet

In today’s tight lending environment, a seller can still get a strong value for the business, but the seller may need to finance more of the purchase price than before. Regardless of the capital structure or finance considerations, a professionally-crafted and creative deal structure is the key.

Typically, seller financing has been somewhere between five percent and 15 percent. With the current lending climate, seller financing may approach 15 percent to 40 percent amortized over 10 years.

After the buyer has proven themselves in the business and shown that the debt payments will be made, the lender may allow restructuring of the seller’s note. As a result, the seller could receive full payment within three years to five years.

While the economy has put a crunch on available financing, it has not had a dramatic impact on the number of potential buyers. We continue to have strong buyer interest in acquisition opportunities and equity capital is still available. With the right buyer, the right portion of owner financing, and the right structure, deals are still getting done across the U.S.

What are the silver linings in today’s market? First, the government has a strong focus on freeing up the credit market and the new administration will continue that effort. Second, although there have been many high-powered, high-paying jobs eliminated over the past several weeks, we are starting to see an influx of contacts by highly-educated individuals who have money and want to acquire their own business as a result.

The American entrepreneurial spirit is still alive.

Ready to Buy or Sell? Let’s Have a Conversation About What CBB Can Do for You

Whether you’re ready to sell the business you’ve spent years building, buy your next opportunity, or explore a merger or acquisition, the right time to start the conversation is now. Certified Business Brokers is ready to help you take that first step with confidence.

Contact us today to get started on the road to success.