Buying or Selling a Business in a Weak Economy

By Andrew J Thompson, Attorney

Not too many years ago, it seemed that nearly every business in America could succeed. It also seemed as if anyone who wanted to sell a business could find a willing buyer at a fair price.

Today, the market is very different. With unemployment hitting record highs, with a long and unpredictable period of recovery, even the most efficiently run businesses with long histories of customer satisfaction and tremendous goodwill, have difficulty finding a buyer who will pay a price that makes sense.

If you've done nothing but contemplate the possibility of a sale, it's doubtful that you're ready to put your business on the market. Merely from an accounting standpoint, the way you've managed your books during the course of running a business meant to be your primary source of cash flow is very different from the way you will want your accounting records to appear to a potential buyer or financing agent for the transfer of ownership.

This typically takes 2-3 years to transition. At the next meeting with your accountant, you should discuss this transition and any counsel you can take in order to start dressing up for a sale. This isn't something deceptive or unethical, it is a process any business that wants to make a successful transfer will go through as it heads to market.

An "exit strategy" works best if it's more than just a plan to sell your business.  Business succession specialists help long time business owners work out their plans for the continuing operation of the business after they are gone, and planning for the owner's personal financial and lifestyle changes after departure,  as well as for the sale of the business itself.  This step combines personal tax planning, retirement planning, and estate planning with the business accounting and finance considerations that are necessary for the sale of any business.

With respect to the stock market, real estate and other investments, in the past year, it has frequently been said that this is a historic buying opportunity.  The same can certainly be said for closely held businesses, asset acquisitions and private equity deals.  With profitable companies on the market at much smaller multiples of EBITDA than in the past, this may be the ideal time to pursue the business acquisition that seemed just a bit too expensive two or three years ago. 

Along with price and efficiency of operations, there are at least two other primary considerations buyers should bear in mind in shopping for an acquisition:

1. making sure to think broadly across lines of business and industries to be sure you're picking from the best array of choices available; and
2. looking for a "platform" ready business model that will enable you to grow, modify and expand in coming years.

Let's say for example, you've run a small manufacturing concern for the past 20 years and are very comfortable with your ability to duplicate your success with another manufacturer.  But profitability is lagging and the future uncertain with all of the manufacturing companies you identify in the marketplace. 

Meanwhile, there are some IT companies, distributors, and health care technology companies ready for sale and priced to close.  Two or three of these companies have multiple years of profitability and a growth model business plan that is working effectively. 

Instead of staying precisely within your comfort zone in manufacturing, it may serve you best to pursue a company that will challenge some of your management skills, but where you will find that the skills you developed previously are highly transferable to into a different industry.  Because these alternate choices have a high likelihood of providing a very significant return on your investment, you can go into a new company without feeling that you're constantly in the middle of a turnaround situation, under pressure to satisfy creditors or meet other intensive deadlines.  Just ask your self, why do you really want to buy a new business anyway?

Afterward, you can look to the future, build your own model of success, and plan to replicate that model with different acquisitions every two to three years.  This is the ideal gameplan for a business buyer, especially one coming in with good talent and funding, but limited experience as a buyer.

 

The reality is that closing a deal got tougher after the fallout from AIG and all that followed in its wake. While interest rates are low, credit remains tight. While loans continue to be made, many borrowers who have closed easily in past times, are shut out today. Underwriting has never been more challenging.

This places a very high premium on seller financing. Buyers are rarely interested in a deal unless the seller has skin in the game anyway, so every seller should be thinking about it's own part in financing a deal before going to market.

Because the gaps are far less likely to be funded through bank financing, it's wise for the seller to be very creative in conceiving terms that would make a deal work. It's often said that a deal will die three deaths on the way to the closing table, before it gets done, but if you are truly a motivated seller, this merely means new opportunity for creatively finding ways that will make a deal work.

The SBA has also stepped up to the table to help facilitate business acquisitions. While fees are being waived, there are some pitfalls to watch for when the SBA is a guarantor.

For example, even though SBA guaranty can potentially be as high as 90%, the SBA places a restriction on the amount of goodwill that can be financed, no more than 50% up to $500,000 of goodwill involved in any transaction. This can increase the down payment requirement in many deals.

Also, involvement of a federal agency does mean even greater scrutiny than with traditional bank lending. A deal can be lost because of a failure to disclose something you may have previously thought immaterial, so each party needs to come in with an understanding that transparency will be tantamount to completing the deal.

The adage..."there's a bull market out there somewhere", should serve as an encouragement to buyers and sellers alike in scanning the horizon of business over the next 12 months. Take advantage of what presents itself now. It may turn out to be a much better time to make your moves than you thought.

Andrew J Thompson is an attorney specializing in the acquisition and sale of small businesses, business assets and other investments. The Thompson Law Office is based in Indianapolis, IN and serves business owners throughout the United States.