Selling a Business in a Down Economy
With negative economic news grabbing 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. Value is dynamic and proper timing makes a big difference in the prices paid for business acquisitions. 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 layed 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:
Spruce up the facilities and check equipment to insure good working condition. Curb appeal makes an impression. A clean, organized facility gives a good feel for how the business is run.
Compile a list of furniture, fixtures and equipment along with applicable service records. This shows a prospective buyer that the company is well maintained.
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.
Streamline overhead and operational expenses to get the highest value. This can include divesting underutilized or obsolete inventory, assets and employees.
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.
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.
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.
Make sure patents, trademarks and other intellectual property rights are properly registered.
Clean up any outstanding legal, financial, or tax issues.
Be advised of and prepare for the questions that prospective buyers will most likely ask.