BUYING AND SELLING…..NOW?

The economy is at or near its bottom, so is this a good time to sell or buy a business? If you looked at business opportunities just a few years ago, profits were up and valuations were high. Now, profits are likely down and available money for acquisitions is scarce. Our world has changed. If you dwell on how things "were", you are just going to disappoint yourself. That ship has sailed, but not all is lost. If you still consider the right reasons for selling and what to expect when buying, the time may be perfect for you. Below is a broker's perspective from studying the market and talking with business owners.

SELLERS

As compared to just three years ago, the market value of your business is likely much lower. Additionally, if you expect to get bank lending for your Buyer, you will have to carry a substantial note; likely on full-standby (meaning you can't collect a nickel until the bank note is completely paid off). However, it is my belief that market values won't skyrocket back to high multiples on fuzzy profits any time soon. Many business owners have been waiting for the economy to recover so they can get more money for their business. This may cause a "glut" of businesses being put on the market all at once as things start to look up. Considering the law of Supply-and-Demand, availability of many attractive businesses will drive prices down; even if profits are up. If you are ready to sell, this is a great time to get your business on the market.

BUYERS

The best businesses to buy are obviously the ones making a profit. That being said, you have to temper your expectations to what the economy has laid out for you. When looking at a business, go back to financial detail from before the recession. If the business was strong, evaluate what made it strong and ensure those conditions are realistically in the cards for the future. You may be getting a deal from the perspective of ROI if a strong recovery is likely. Keep in mind that the business has survived the economic lull and is still running. That alone speaks volumes about the stability of the business.

SELLERS & BUYERS

Regardless of which side of the table you are on, keep in mind where the other person sits. We always encourage a win-win scenario for the long-term stability of a transition. As the Buyer, you may need to call on the Seller with questions and/or support down the road, and the Seller likely has a personal connection with your customers. You probably don't want the Seller to feel cheated, as much as you want a "bargain". As the Seller, you are probably carrying some degree of financial risk based on the Buyer's success. If you oversell the business and the Buyer is unable to make payments, you both lose. Don't set yourself up for failure!

Exit Planning vs Exit Strategy

It pains me to see a business closing for no other reason than poor planning. Your business is likely your largest asset; or at least one of your largest assets. You have worked very hard to build it, and even harder to keep it going through these tough economic times. In selling your business, you will likely get some multiple of the annual "sellers benefit" (the true money you make off of the business as an owner) plus some value for your inventory. The goodwill you have created includes the customer base, supplier chain, and the work it took to get past the start-up hurdles that tackle so many would-be entrepreneurs.

Unfortunately, poor planning can reduce your "cash in" to a liquidation sale or worse. If you are locked into a lease agreement, you may have to pay severe penalties by not finishing the lease term. You may also be unintentionally hurting your employees by unnecessarily eliminating their jobs, and punishing your valued suppliers by reducing their sales volume. The loyal customers that have come to rely on you will also be lost with the sudden closure of their resource. Are you OK with all of this because of poor planning?

By planning your exit, we aren't talking about developing a strategy of establishing your income options for when you exit the business, what you will do after the sale, or spending a large number of hours in preparing financial statements. That is the strategic piece of your exit that will help maximize the proceeds you get from your exit. The planning piece is to know when you want out, and setting the ball in motion to make that move.

Many people relate the sale of their business to the sale of a home. Just a few years ago, homes were selling within minutes or days of listing the home with an agent. After all, in California, a Business Broker carries the same license as a Real Estate Agent. However, the two assets are vastly different. The sale of a business requires a high degree of confidentiality. There are other "strategic" factors that make this a difficult sale, but we will save that discussion for another day. The key is that the confidentiality and due diligence necessary to sale and/or acquire a business are lengthy processes. In a good economic climate, it can take the biggest part of a year to sell a business. In today's economic storm, there are multiple hurdles that can force a sale into greater than a year. If you are thinking about exiting your business in the next year or two, a business broker such as CEO Business Brokerage would likely be happy to spend a little time with you to educate you on the process and timing needed to do the job correctly. If you are leaning further out into the five year window, a business broker can talk with you about how Asking Prices are derived, and you can begin to develop an Exit Strategy to maximize your Selling Price when the time comes.

Whatever the future holds, a good plan is instrumental in making it the best it can be. Don't let one of your largest assets go to waste.

Business Acquisitions: Using Advisors

Advice comes from many places, and everyone is entitled to have an opinion. However, with regard to proper education and experience, the difference between advice and opinion should be clearly understood. In buying small businesses, it's very important to utilize the resources at your disposal to get some expert advice. The key is to know who those advisors are, how to work with them, and what to expect of them.

Friends and Family are a great source of advise if utilized properly. With your friends and family, you are looking for a second opinion of "fit" for "you" with a business opportunity. These people know your personality and if you will be a good fit for the hours, type of people that are customers, and type of products. Will you enjoy this for the long-haul, or are you looking for something that this will only partially meet? Keep in mind what you are asking of these individuals, and save the legal, financial, and business analysis advice to the proper experts.

Your Accountant may be an excellent person to consult for financial advice. How are you going to juggle the working capital required for this business? What should you be concerned about with the businesses financial reports? What are the tax advantages and disadvantages that you will face? How should the allocation of the purchase price be done? What are the financial consequences of different corporate structures for your pending acquisition, and how should you put it together? Some accountants deal with personal or large business financials. If your accountant doesn't specialize in small business accounting, find one that is.

Your Attorney may be able to review the contracts prior to you signing them with every aspect of your acquisition. They should also be able to advise on corporate structure and the legal protection offered by different entities. Your attorney may also have an opinion regarding your legal exposure to different types of businesses and should alert you to be cautious. As with accountants, there are attorneys that specialize in different aspects of their industry. You should ensure your advisor has expertise in small business.

Your Business Advisor should be able to help you with the analysis of the business, what to ask for of the Seller, and what to look for. Some Business Brokers will work in an advisory capacity for a small fee, and will have the expertise to uncover areas of concern. This advisor should be able to help with due diligence questions and review, proper market valuation, and is knowledgeable in the proper steps and forms to use in making your acquisition. It is possible that this advisor will also be able to represent you throughout the acquisition.

Regardless of the advisors you use, a key to keep in mind is to ask for areas of concern pulling from their expertise. Ultimately, the decision to move forward is yours alone, and you should not ask anyone, "Should I do this?". Putting that kind of responsibility on anyone other than yourself should result in "No" for an answer. No one should be asked to carry the burden of your success or failure but yourself.

Steve Peters CEO Business Brokerage

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Since 2006, CEO Business Brokerage has worked with small and medium sized businesses in Southern California.  CEO Business Brokerage agents have niche focuses for general business brokerage, retail, manufacturing and the businesses that support manufacturing.  This includes light manufacturing, janitorial, accounting, and service businesses throughout the Los Angeles County, Orange County, and the Inland Empire.  CEO Business Brokerage is an active member of the California Association of Business Brokers and currently heads the Inland Empire Subchapter of CABB.

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