In reading about the issues facing small businesses in the United States since the recession began in late 2007, I have heard about many sectors that have fallen behind historical performance levels. One that I hadn’t considered very much until this week is what is called the “business-for-sale” sector, which has seen a huge drop-off in comparison to all metrics known prior to the recession. While many have spoken about the large amount of private equity not in circulation, many of the reasons it is being withheld translate to other types of business buyers.
Whether you are representing an equity firm or your own personal business interests, it is likely that you have been trying to figure out when the economy may turn around. In classic business theory, it would be ideal to buy at a deflated price right before the economy picked up so that your investment could piggyback onto the general trend of successful recovery. Such market timing could make your investment produce very high–perhaps unprecedented–returns.
Since the economy appears to have stabilized, though not surged forward in a demonstrable way, what are these people who would otherwise be buying small businesses thinking? Observers of the business-for-sale sector wonder when they will see a positive change. They are anxious to see more acquisition activity.
Hindrances to Business Sales
Whether you listen to political pundits, talk show hosts, or economists, all would concur (at least publicly) that small business is key to the overall recovery. Yet, if small businesses are not churning ownership, it is hard for them to obtain the necessary working capital to fund growth and operations. BizBuySell.com conducted a survey of 260 business brokers from around the country to attempt to determine whether market conditions were improving. A whopping 70 percent indicated that financing for business acquisitions has not improved since 2011. These findings and percentages are consistent with survey results from last year, showing a trend of stagnation.
With commercial loans harder to come by (according to the survey), many buyers can’t get the financing they need to do deals. Business brokers say that banks have made the loan process even more difficult in 2012, decreasing the chances thereby that buyers will begin investing in businesses for sale. Mike Handelsman, group general manager for BizBuySell.com and BizQuest.com, reports that borrowing is particularly difficult for new or young entrepreneurs. Since banks and similar entities have taken the position that a track record of success is one of the top determinants of future success, newcomers to the small business arena–either startups or acquirers–are handcuffed.
Handelsman cited other factors of concern to business brokers from the survey. Concerns about the U.S. national debt, political deadlock (re: the fiscal cliff), long-term unemployment and small business/personal tax rates (14%) also appear to diminish buyer confidence. However, he did offer some tips for sellers:
Seller financing is not necessarily the right strategy for all business succession scenarios. But under the right circumstances, a seller’s willingness to finance a portion of the sale can dramatically increase the number of potential buyers and create more advantageous sales terms (e.g. a higher sale price). Sellers also need to plan for the sale, and make their businesses as attractive as possible to buyers.
Here are a few ways to plan for the sale and make your business attractive–
- Install an outside board of directors, with positions filled by non-competing entrepreneurs rather than the typical CPA, attorney, banker, and family friend.
- Stop paying executive perks out of business accounts–clear separation will help show your commitment to professional management.
- Document the tasks and procedures performed by the executive team. When it has been documented, the business is worth far more money because it is no longer dependent on the personalities.
- Have a CPA review your financial statements–audit if you can afford it–especially if you have never had it done before.
- Work with a transactions attorney to advise on deal structure and terms so that you can think through tax implications that may cause you to accept certain types of offers.
Chin up! If you follow these best practices, you will be one of the first ones to sell your business, regardless of whether many others sell theirs at the same time.