Selling Your Business: Is Now A Good Time?

USABizMart > Bizblog > Selling Your Business: Is Now A Good Time?

Posted on January 9, 2009 by Peter Siegel, MBA

Selling Your Business: Is Now A Good Time?

Owners of small and mid-market companies who've been thinking about selling out are probably distressed about current economic circumstances. Raising money needed to complete deals seems an almost impossible challenge. And buyers are anxious about what may happen to small businesses in the future. So this may seem like the time to put off any plans to retire or get into another business.

And yet, many, if not most owners can put their businesses on the market and fully expect to receive offers to purchase from qualified prospects--and, at a fair price.

But thoughtful preparation is critical to making that happen. And here are some suggested steps:

PUTTING THE SLUMP IN PERSPECTIVE

Forget the recommendation to show buyers a three-year history of sales and earnings. What they should see is six, or eight, or ten years of performance, so the current dip in revenues can be seen as a normal stage in the up-and-down business cycle. With most industries, a downturn--such as the one we're currently experiencing--is followed by a period of recovery, with business improving and profits growing.

"EARN OUT" POSSIBILITIES

For the skeptical buyer who asks: "But what if things don't improve?" The answer is: "If you're worried that business won't get better, then you won't mind sharing the profits with me when it does!"

The "earn out" is a way to solve a negotiating impasse with a formula that starts at a lower initial price, but increases the buyer's payments to the seller as revenues improve. There are several ways to do this and a knowledgeable broker or business lawyer can propose a suitable plan, such as having the buyer pay the seller regular business growth "commissions" following close of escrow.

ALTERNATE FINANCING STRATEGIES

Sellers frequently want to get cashed out when selling a business. But in these times of tight money, the way to receive the desired price for a small or mid-market company is to help finance the purchase. Besides, sellers usually enjoy tax benefits when helping to fund a transaction. And for the seller who's worried about collecting all payments due---not having to take back the business--the buyer can provide a trust deed in a home to help secure the debt. If the lending market was functioning as it did in the past, many buyers would be raising purchase money by putting up their homes anyway.

Financial assistance from vendors might be available if a deal is structured correctly. Rather than pay off all debt to suppliers and turn over a business "free and clear," the seller might consider adding what's needed to inventory, increasing the company's accounts payable figure. The amount of built-in debt assumed by the purchaser is money that does not have to be raised for payment to the seller at close of escrow. Note that vendors need to agree to this arrangement. Their motivation is to continue doing business with the company being sold.

Excluding some of the company's older equipment from the transaction means the seller can sell it separately for cash. Meanwhile, the buyer will purchase replacement equipment with financing provided by that equipment's supplier.

SECURING A BETTER LEASE

With commercial landlords and landladies anxious about their business tenants’ ability to remain financially healthy so lease payments come in on schedule, it is an opportune time for many business owners to restructure their leases. Property owners throughout the country are learning it's better to continue receiving regular rent, even at a lower rate, than to lose tenants who can't pay those higher rentals that were negotiated when business was booming.

MAKING PROFIT CONSCIOUS CHANGES

Rather than tell a prospective buyer that profits will improve if he lays off the least-productive employees, cuts out non-vital expenses, negotiates a better deal with suppliers and launches a marketing campaign, it's best for the seller to take those actions now. Or at least get started with implementation of the strategies.

Good news for sellers, incidentally, is that corporate layoffs result in more prospective buyers in the market. Getting a company prepared for sale, as suggested, increases the likelihood of attracting a qualified buyer ready to do business at a satisfactory price.