SELLER RESOURCE CENTER
Why 2020 & 2021 May Be the Best Time to Consider Selling Your Business - Here are the Reasons Why
Business owners are surprisingly predictable when it comes to selling their companies. When revenues are rising and money is cheap; they delay. This can have serious consequences when the market turns. Every business owner will exit their business someday. The decision to sell is often both personal and financial. The personal reasons can vary widely, but here are some proven reasons why you should consider selling right now:
Sale prices are up in most major industries are up significantly, some double digits.
Capital is readily available but this could changes soon due to the possibilities of a recession. Currently funds are available to finance deals and interest rates are cheap. For Main Street deals (under $5 million revenue) SBA lenders have not been this aggressive since before the recession. For M&A size deals ($5 - $50 million revenue+ deals) capital is also readily available.
Strategic buyers, large and small, are making moves to grow through acquisition. Your competitor who is the same size as you now could be acquired instead of you, making you the small player in the market.
Revenues and Earnings are up so sell now from a position of strength. One down year can cause a three year delay in a sale as buyers like to see 3 years of growth or at the very least 3 years of stability.
Buyer demand is off the charts, which drives multiple offers and higher sale prices. Buyer inquiries at Sunbelt are up 75% over last year as buyer confidence has been boosted by the economy and affordable deal financing.
It is a Seller’s market as buyers out-number sellers. This will change as baby boomers, who own 66% of small and midsize companies, finally make the decision to sell. This "Age Tsunami" is expected to invert demand, creating a surplus of businesses for sale and changing the market to a buyer's market.
Low Interest Rates are a great reason to sell now – the higher the interest rates the lower the multiples
Likelihood you will get an offer is up 19% over the benchmark average.
Transactions are reaching record levels in 2015 as brokers reported the highest number of businesses changing hands since BizBuySell started tracking data in 2007. Closings are up 55 percent over 2010 to 2012. Much of this growth can be credited to Baby Boomers who are reaching retirement age and ready to pass the torch on their life's work. In fact, in a recent survey of business brokers, 78 percent of brokers attributed at least a quarter of their last 12 months closed transactions to Baby Boomer sellers.
Optimism of both Buyers & Lenders is as high as it has been in years making this a great time to sell.
Other Trends include higher offers for companies with management teams in place, with reoccurring revenue, in growing industries, where there is obvious upside potential and the highest multiples go to the companies with the highest revenues and profits.
At Sunbelt Business Brokers and M&A Advisors closings are up significantly over last year and average sale prices are up, driven by higher multiples, better financing and companies with strong earnings. There is no perfect time to sell, but the conditions are very favorable right now. The Las Vegas office in particular is owned by one of the largest independent business brokerage firms in the country. We have direct access to buyers, acquisition professionals and a staff of others that can help seek out additional buyers specific to your industry. In addition, we have access to in house counsel and have strategic partnerships with private equity groups, lenders, mezzanine financing firms, tax professionals and M & A attorneys - all who are experts in business transactions. If you are thinking about selling, now is the time to consult with Sunbelt Business Brokers, to be educated on what you can do to maximize your selling price and to help plan for an exit when the time is right for you.
If you are one of those business owners that were considering selling your business back in 2008, I don't have to remind you how our most recent recession drastically altered those plans. The stock market crash and ensuing recession brought the sale of businesses to an abrupt halt. Banks stopped lending and buyers took such a large hit in their portfolios that most couldn't afford to acquire a business. If you didn't get caught in the tidal wave that put 170,000 businesses out of business between 2008 and 2010 and were fortunate enough to sell your business in the midst of the recession, you mostly likely sold it for a fraction of what it was worth only a few months prior and probably had to seller finance the majority of the purchase price. So, not only did you sell your business at a discounted price, you had to be "the bank" as well and assume the risk of actually getting paid. Does that scenario sound familiar to some of you? And, what are the chances of that scenario repeating itself in the near future?
The good news is that the Great Recession is now firmly in the rear view mirror. Banks are back in the business of providing capital for business acquisitions and buyers once again have the means and confidence to acquire businesses. This has led to not only a significant increase in the number of businesses being sold in the past 2 years, but these businesses are selling for much higher prices that have finally returned to pre-recession levels!
What only recently was a full blown buyer's market has now tilted decidedly in the favor of the seller. It's no longer a question of whether or not "now" is a good time to sell a business. It's now a question of how long will this seller's market last and, if you plan to exit your business in the next 1 to 5 years, will it still be a seller's market when you do decide to sell? Unfortunately, none of us have a crystal ball that can tell us when this seller's market is going to end. However, I think we can all agree that the next recession in not a matter of "if", it's a matter of "when".
Below is a chart of the recessions that have occurred since the Great Depression. As the chart indicates, the US has experienced 14 recessions in that period of time. On average, the time between the end of one recession and beginning of the next is 4 years and 2 months. Our last recession officially ended in June 2009. That's a sobering thought considering that as of the end of 2015, 6 years and 6 months will have gone by since the recession ended. Based on past averages, we are now "living on borrowed time" when it comes to the inevitable start of the next recession.
So just when will the next recession hit? CITI believes there's a 65% chance that the US will experience a recession in 2016 or 2017. JP Morgan is not quite as pessimistic. They believe there's only a 23% chance of a recession occurring in 2016. However, those odds increase to 76% by the end of 2018.
Building Value to Maximize the Selling Price
Prior to putting a company on the market for sale, the question of value has to be addressed. Increasing the value should, in fact, be considered a year, preferably two, prior to sale. Value is based on profitability, cash flow, management and the overall quality of the operation itself. Here are some considerations in building value, whether the business is going to be sold or not.
Are the company’s pricing policies set too low, creating low margins? Perhaps they were set some time ago in order to boost sales. Now might be a good time to review them to make sure they are in keeping with current market conditions.
Is the inventory level too high? How about work-in-progress or finished goods? Increasing the turns in inventory can increase cash flow.
Are you paying too much for raw material? Talk to your vendors and suppliers, you might be able to get some better prices or terms. Take a look at all of the expenses: utilities, telephone, technology, office expenses – it all adds up.
Are there services that could be outsourced for increased savings?
Increasing the quality of customer service may entice customers or clients to pay their bill promptly.
Are all the employees working together to improve the operation and profitability of the company?
These are just a few of the areas that can and should be reviewed. Although profits are important, there is an old expression that cash is king. The time to take a look at the overall company operations is now.
In addition, consider the following important areas of a company. How does your company stack up in these critical areas? If you were to rank them on a 1 to 4 scale, for instance, what would your score be? The higher the score the more valuable the company! They are considered value drivers – in other words, they are important to a prospective buyer.
Type of business
History of company and industry
Return on investment
Quality of financial statements
Terms of sale
For example, in looking at a company’s financial data – are the statements audited or merely compiled? Is the growth of the company slow or is it growing quickly? How about the customer base – is it based on several major ones, or is it spread out over many customers? The time to consider these critical value drivers is now!
Common Seller Questions
How long does it take to sell my business?
It generally takes, on average, between five to eight months to sell most businesses. Keep in mind that an average is just that. Some businesses will take longer to sell, while others will sell in a shorter period of time. The sooner you have all the information needed to begin the marketing process, the shorter the time period should be. It is also important that the business be priced properly right from the start. Some sellers, operating under the premise that they can always come down in price, overprice their business. This theory often backfires, because buyers often will refuse to look at an overpriced business. It has been shown that the amount of the down payment may be the key ingredient to a quick sale. The lower the down payment (generally 40 percent of the asking price or less), the shorter the time to a successful sale. A reasonable down payment also tells a potential buyer that the seller has confidence in the business’s ability to make the payments.
What Happens When There is a Buyer for My Business?
When a buyer is sufficiently interested in your business, they will first submit their buyer profile, disclose the capital they have available and sign the confidentiality agreement. They will then be given the detailed business summary. If they continue to be interested they often either submit questions, request a conference call with the Seller or even a meeting with the Seller. Once they determine they want to move on, he or she will, or should, submit an offer in writing. This offer or proposal may have one or more contingencies. Usually, they concern a detailed review of your financial records and may also include a review of your lease arrangements, franchise agreement (if there is one) or other pertinent details of the business. You may accept the terms of the offer or you may make a counter-proposal. You should understand, however, that if you do not accept the buyer’s proposal, the buyer can withdraw it at any time. At first review, you may not be pleased with a particular offer; however, it is important to look at it carefully. It may be lacking in some areas, but it might also have some positives to seriously consider. When you and the buyer are in agreement, both of you should work to satisfy and remove the contingencies in the offer. It is important that you cooperate fully in this due diligence process. You don’t want the buyer to think that you are hiding anything. The buyer may, at this point, bring in outside advisors to help them review the information. When all the conditions have been met, final papers will be drawn, escrow documents prepared, leases put in place and a closing is scheduled. Once the closing has been completed, money will be distributed and the new owner will take possession of the business.
What Can I Do To Help Sell My Business?
A buyer will want up-to-date financial information. It is important that you keep the business operating properly and that you maintain the goodwill of the business. If you use accountants, you can work with them on making current information available. If you are using an attorney, make sure he or she is familiar with your brokers role, the business escrow process and has reviewed all of the agreements. Time is of the essence in any business sale transaction. The failure to close on schedule can permit the buyer to reconsider or make changes in the original proposal.
What Can Sunbelt Do For You?
Sunbelt business brokers are the professionals who will facilitate the successful sale of your business. It is important that you understand just what a professional business broker can do — as well as what they can’t. They can help you decide how to price your business and how to structure the sale so it makes sense for everyone — you and the buyer. They will prepare a professional summary of your business and market the opportunity nationally in a way that brings the most interest yet protects your confidentiality. Your broker will screen the buyer prosepects and ensure that you only give the appropriate information at the appropriate time. Your brokercan find the right buyer for your business, work with you and the buyer in negotiating, and work with you both every step of the way until the transaction is successfully closed. They can also help the buyer in all the details of the business buying process. What they do not do is represent the Buyer and should always be acting your interest. Your Sunbelt Broker will always have a potential buyer sign a document making it clear that you only represent the Seller. A business broker is not, however, a magician who can sell an overpriced business. Most businesses are saleable if priced and structured properly. You should understand that only the marketplace can determine what a business will sell for. The amount of the down payment you are willing to accept, along with the terms of the seller financing, can greatly influence not only the ultimate selling price, but also the success of the sale itself.
Preparing Your Business for a Sale
1. Price: Work with your broker to place a reasonable price on your business. An inflated price turns off or slows down potential buyers. Rely on your business broker to help you arrive at the best "win-win" price. Maximize the price by maintaining or improving profitability.
2. Operations: Carry on "business as usual." Don't become so obsessed with the transaction that your attention wavers from day-to-day demands, affecting sales, costs, and profits. Since the selling process could take some time, the buyer needs to keep seeing a healthy business. A business that is growing and profitable is worth much more than one that is shrinking.
3. Confidentiality: Engage brokers that take steps to insure confidentiality. A breach of confidentiality surrounding the sale of a business can change the course of the transaction. Expert Sunbelt intermediaries can ensure that the parties involved keep the sale and negotiations confidential.
4. Preparation: Prepare for the sale well in advance. Be sure your records are complete for at least 3 years back and do all pertinent legal or accounting "housecleaning" - as well as a literal sprucing-up of the plant or store. Preparing a due diligence binder that shows proof of any personal expenses, one-time expenses or non-business expenses helps ensure that a buyer close on the sale and helps with financing.
5. Anticipate: Prepare information the buyer may request. In order to obtain financing, the buyer will need a verifiable financial history, a copy of your lease, equipment leases, equipment valuations, appraisals on assets such as real estate, as well as information to satisfy environmental regulations (when real estate is concerned).
6. Competition: Achieve leverage through buyer competition. This can be tricky; you are wise to let your business broker, as a third party, create a competitive situation with buyers to position you better in the deal.
7. Flexibility: Don't be the kind of seller who demands all-cash at the closing, or who refused up front to accept any contingent payments. Depend on the advice of your business broker - their knowledge of financing and tax implications will help keep the deal in place.
8. Negotiate; don't "dominate." You're used to being your own boss, but be prepared to learn that the buyer may be used to having his way, too. With your business broker's help, decide ahead of time when "to hold" and when "to fold,"
9. Timing: Keep time from dragging down the deal. To keep the momentum up, work with your business broker to be sure that potential buyer’s stay on a time schedule and that offers and due diligence move in a timely fashion.
10. Your Involvement: Be willing to stay involved after the closing. Even if you are feeling burnt-out, realize that the buyer may want you to stay within arm's reach for a while. Consult with your business broker to determine how you can best effect a smooth transition.
11. A survey of hundreds of privately held U.S. companies that were sold or transferred pointed out the most common things a company can do to improve the prospects of selling:
improve profitability by cutting costs
show a history of sales and profit growth
keep records of one time or non business expenses
maintain monthly financial records
maintain your assets including all furniture, fixtures and equipment
improve the management team so that the business does not totally depend on you
upgrade computer systems, website or other technology
Due Diligence — Do It Now!
Due diligence is generally considered an activity that takes place as part of the selling process. It might be wise to take a look at the business from a buyer’s perspective in performing due diligence as part of an annual review of the business. Performing due diligence does two things: (1) It provides a valuable assessment of the business by company management, and (2) It offers the company an accurate profile of itself, just in case the decision is made to sell, or an acquirer suddenly appears at the door.
This process, when performed by a serious acquirer, is generally broken down into five basic areas:
• Marketing due diligence
• Financial due diligence
• Legal due diligence
• Environmental due diligence
• Management/Employee due diligence
It has been said that many company officers/CEOs have never taken a look at the broad picture of their industry; in other words, they know their customers, but not their industry. For example, here are just a few questions concerning the market that due diligence will help answer:
• What is the size of the market?
• Who are the industry leaders?
• Does the product or service have a life cycle?
• Who are the customers/clients, and what is the relationship?
• What’s the downside and the upside of the product/service? What is the risk and potential?
Two important questions have to be answered before getting down to the basics of the financials: (1) Do the numbers really work? and (2) Are the seller’s claims supported by the figures? If the answer to both is yes, the following should be carefully reviewed:
• The accounts receivables and payables
• The financial statements as compared to the tax returns
• The inventory and all other physical assets
Are contracts and agreements current? Are products patented, if necessary? How about copyrights and trademarks? What is the current status of any litigation? Are there any possible law suits on the horizon? What would an astute attorney representing a buyer want to see and would it be acceptable? Using a Seller's Disclosure will go a long way to limiting future liability.
Not too long ago this area would have been a non-issue. Not any more! Current governmental guidelines can levy responsibility regarding environmental issues that existed prior to the current occupancy or ownership of the real estate. Possible acquirers – and lenders – are really “gun-shy” about these types of problems - especially when it is the sale of a gas station or business that uses chemicals, solvents etc.
What employment agreements are in force? What family members are on the payroll? Who are the key people? In other words, who does what, why, and how much are they paid?
The company should have a clear program covering how their products are handled from raw material to “out the door.” Service companies should also have a program covering how services are delivered from initial customer contact through delivery of the services.
The question is, do you give your company a “physical” now, or do you wait until someone else does it for you – with a lot riding on the line? Completing due diligence with your broker prior to the listing of a business goes a long way in identifying potential problems in the future.
Ten Questions Every Buyer Wants Answered By The BizBuySell Staff
If you are seriously considering selling your business, then you need to be prepared to answer questions from inquiring business buyers. Each business transaction is unique, but there are routine questions and common concerns that nearly every prospective buyer has. Being prepared to answer these questions will give you a leg up on negotiations and close the deal quicker.
Why Are You Selling?
It’s perfectly acceptable to most buyers if you’re selling your business because of retirement, relocation or a death in the family. Yet, if you’re business is in decline or facing some sort of obstacle, you want to present this information as evenhanded as possible. Start by highlighting your business’s strengths and future potential, and don’t leave out what makes it unique. Once you’ve shared the truth as to why you’re selling your business, a buyer may see its potential as a worthwhile investment. You may even have suggestions as to how the right person may be able to turn it around.
Is The Business A Good Fit?
This is something the buyer will determine on their own, but you can help them in reaching this decision. You should already have a sense of your ideal buyer. This is someone with the knowledge and skills to operate your business successfully, not just someone with the financial means to make the purchase. If a potential buyer appears to be a good fit for your business, then you should let them know this when they first contact you.
Is the Business Profitable?
One of the first questions a buyer will ask is whether or not your business is profitable. They will want you to show them the bottom line in your financials, including revenue, cash flow and profit and loss statements. Also, they will want to see a healthy multi-year trend of increasing revenue and a forecast for continued revenue growth. Providing documentation that business is steady and growing will likely make a positive impression.
What Is Its Position in the Market?
Is your business uniquely positioned in the market? Buyers will be impressed if your business offers products or services that differentiate it from competitors. Smart, forward-thinking prospects will scrutinize your products and operational processes in order to assess your businesses ability to retain its position in the market.
Is It Priced Right?
A smart buyer will ask to see detailed proof that validates the financials you’re presenting. Can you prove the numbers? To ensure that purchasing the business is a solid investment, you must be certain that the revenue and profits can be supported.
Is Your Business Staffed with Experienced Employees?
A business staffed with highly skilled, experienced employees can make all the difference to would be buyers. Moreover, key employees under contract who will remain with the business for a set period of time offer stability and continuity to the business after the sale. This is a value-add and further sweetens the deal.
Does Your Business Have an Established Customer Base?
An established customer base that will remain with the business after the sale is invaluable to prospective buyers. It further demonstrates that the business is well-established within its market with a loyal group of customers. This is especially true for a business with a limited number of active customers.
Can The Business Be Financed?
Very rarely will a buyer offer an all-cash deal and most buyers expect to put down a substantial deposit with the remainder financed. Yet, acquiring the needed financing from lenders can be a challenge. This leaves you, the seller with two options: lower you asking price or work with the buyer to overcome their financial challenges. Seller financing is becoming more and more popular, as sellers realize it not only dramatically increases the pool of buyers, it also allows them to get a better price.
Will the Lease Be Assigned?
If the business relies upon its location, the lease can be a critical factor. More than likely, the lease can be assigned to the new owner. But, before putting your business on the market, check the terms of your lease and see if it allows for an assignment. There may be conditions, such as personal guarantees and increased deposits imposed on the seller and the buyer. If the lease cannot be assigned to the new owner, ask the landlord what is required for the new owner to be approved for a new lease.
Are Their Hidden Complications?
Expect prospective buyers to ask whether or not you have any skeletons in the closet. They will most likely be uncovered during the due diligence process, so it’s best to be upfront with buyers and deal with them early on. These sorts of things may include legal liabilities, sketchy financials, labor relations problems, a history of poor customer service, or any other hazards that affect the sale of the business. If you try to hide them, or put off mentioning them, they will eventually surface and you will likely lose your credibility that you’ve established with any prospective buyer