For obvious reasons, most business owners believe this is a bad time to sell their business. They believe the value of their business is down because sales and profitability are down. Many are reluctant to sell if their business is making money because of fear and perception, not reality. They believe financing is impossible for buyers to obtain. Some of this is true, but what they are not aware of are the trends in small business sales today, and the advantages to selling their business in our present economy.
If a business is not profitable there is little or no goodwill value left in the business to sell. Potential to achieve profitability has little present value. If your business is not profitable and you must sell, unfortunately, you will most likely have to sell at the market value of your hard assets which can be less than 50 percent of what you bought them for. There are many, many businesses on the market today that are not profitable but priced as if they were.
The good news for those who have profitable businesses is that there are fewer good businesses on the market today than there has been for years. This shortage of quality businesses has increased the competition among buyers which has lead to increased market value. If you need or want to sell your quality business, meaning you are profitable, have good financial records, are not the critical employee and are willing to help with buyer financing, there is a good chance you will get more for your business today than you could have gotten before the downturn.
Some business owners are reluctant to sell their business today because it is producing an income and even if they wanted to or needed to sell they figure they will wait out the bad economy. Before deciding to wait, consider that when the economy rebounds, which all the experts agree will happen, the value of your business may decrease as more quality businesses become available. Also, if you sell your business today, depending upon how your business is structured, you will most likely pay 15 percent capital gains tax on the proceeds. According to the Wall Street Journal there is a good chance the capital gains rate will be increased to 25 percent or more in the near future. If this happens your business will have to increase in value 24 percent for two consecutive years for you to end up with the same after tax cash, CFO.com calculates.
Lack of financing is one of the most talked-about subjects in the business news today. This is another reason sellers are hanging on to their businesses. In the past financing for businesses valued at $2 million or less came from buyer savings or securities, buyer investments, conventional bank loans, or SBA guaranteed loans (7a). Unless you have been living under a rock for the past two years you know what has happened to these loan sources. Out of necessity a new source of lending has emerged which is "The Bank of Sellers."
Most sellers are naturally reluctant to finance, or carry back, any portion of the sale of their business because if the buyer defaults you are out the remainder of what they owe. There are ways to mitigate some of the risk of seller financing to gain an advantage. Make sure the buyer's credit is sound. Protect your ability to keep a very close eye on the financial state of the business as long as the buyer owes you money. In the sale contract clearly define your ability to take back the business should the buyer default. Obtain an interest rate on your loan that is commensurate with the risk you are taking. Keep in mind, in today's economy you may be the only source of financing the buyer can get. Take advantage of the lack of financing competition. The more you finance the more you can ask for your business and the more you will earn in interest in addition to your sale price.
In order to take advantage these market trends you must position your business for the best possible price. Here are some tips to help in your positioning:
* Remain profitable. You may have to make some tough decisions regarding layoffs and how you report cash sales. But it is essential to show a profit or very few buyers will be interested in buying your business.
* Discontinue long-term programs with long-term results. The new buyer can start these programs after they have learned to operate your business.
* Understand what creates value in your business. Some of these elements are good recordkeeping (including cash reporting), you and your family not being critical to the operation of your business, willingness to carry back a significant amount of the sale price and finally, profitability.
* Understand buyer behavior in the present market.
* Seek professional advice from a business broker, an attorney and a CPA before placing your business on the market.
There is no question the market for business sales is somewhat bleak but the fact remains- good businesses are still selling to good buyers. Knowing the current trends in business sales and how you can take advantage of them will enable you to more effectively sell your business.
Dennis Grundy is a principal of Murphy Business and Financial, a northern Nevada business brokerage firm. Contact him at d.grundy@murphybusiness.com or call 775-850-5835.
