Now may be as good a time as any to sell a company. But know what buyers want — and why you’re selling.
By: James Cassel
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MIAMI, Florida, October 16, 2011 – With talk of a double-dip recession, continued high unemployment, and a schizophrenic stock market, business owners contemplating selling their businesses might think they would be better off closing the doors and throwing away the key. However, now is as good a time as any to take a serious look at selling your business. By waiting, you may not get a better price. Or worse, you may not be able to sell at all.
Right now, money is out there. Companies have squeezed more productivity from workers and refrained from hiring (unfortunately keeping job numbers dismal). In the process, they have accumulated lots of cash. As a result, many companies are sitting on capital, and they’re ready to invest in acquiring other businesses.
Debt is available for quality opportunities, too. Despite what the U.S. Congress and the White House have been saying, debt is not always a bad thing; and the Federal Reserve agrees. The Fed’s policies have dramatically increased the availability of money for banks to lend, at least through the middle of 2013. In addition, banks have spent the past two years cleaning up their balance sheets, and now they’re poised and ready to lend. That means buyers can obtain the financing to acquire your company.
How can business owners know if their company will sell? Buyers are attracted to profitability, opportunities for growth, a diverse customer base, and the potential for a competitive advantage among others. In terms of specific industries, at the moment buyers are paying lots of attention to health care, manufacturing, social media and technology companies. However, any business that has successfully weathered the recession can be an attractive target to buyers. These companies have proven their stability.
Know your circumstances
Before a business hangs a “for sale” sign, though, owners should take a good look at their circumstances to clearly understand their reason for selling. That will help you and your advisors determine the best deal structure, identify the right buyer, and command the highest price.
Sometimes life circumstances beyond the business owner’s control force a sale. Illness and death are two common examples. Likewise, divorce can lead to a sale. (Just ask the owner of the L.A. Dodgers.) Often in these situations, selling is not “optional,” so you may have to make certain concessions on price and deal structure.
When divestiture is less urgent, there are more options to consider. For instance, when business owners want to cash out of their company — either to gain liquidity or to minimize risk — they may opt for a sale or partial sale.
Keep in mind, a partial sale brings outsiders into the business, and that comes with risk as well as strings. Owners may want a buyer with in-depth knowledge of their business, someone who can carry on the legacy of the company and grow the brand. Also, recognize that the new owners may change the status quo, especially as it relates to employees and customers.
Buyouts in the middle market typically don’t produce enough proceeds for the seller to replace the income generated by the business, unless it happens to be something like Facebook. If the business produces $1 million a year in cash flow, an owner would need to receive a net sale price of approximately $20 million to replace this annual profit (assuming your financial advisors can earn annual investment income of 5 percent). However, a business generating $1 million is rarely sold for such a large sum. Companies in today’s economic climate usually sell for four to eight times earnings.
If the seller of a business expects a higher price than the buyer is willing to pay, then an earn-out can provide additional funds if (and only if) the business achieves a certain level of earnings or revenues. The valuation gap between the seller and buyer can also be addressed if the seller retains a small stake in the business to generate future income — and maintain some control.
Owners can also negotiate an employment agreement where they stay around to lend expertise and experience to the new owners. Just be prepared to adjust to a different management style and no longer sit in the boss’ chair.
If you decide a sale is right for you, you will need to have several documents readily available in preparation of the sale. Sellers will be asked to provide interested buyers with accurate financial reports in a timely manner — such as profit-and-loss statements as well as customer contracts, inventories information and lease agreements. Don’t even begin marketing your business until you can produce the necessary documentation.
Many owners have no idea what their business is worth, and finding the right price is essential. Unlike the sale of a home, the seller typically doesn’t have a true asking price, so hire financial advisors with specific experience in mergers and acquisitions. The right team can help market a company confidentially and structure a favorable deal that helps you achieve your goals.
Today is the debut of Minding Your Business/Inside the Deal from J ames Cassel, who is co-founder and chairman of Cassel Salpeter & Co. A veteran investment banker, Cassel’s specialties include mergers, acquisitions and divestitures; corporate finance; and public offerings. The column will appear once a month.