ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Buying or Selling a Business in a Weak Economy

Updated on June 15, 2010

Closing the Deal

Finding the Right Buyer or Seller

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.

Good Planning: The Exit Strategy

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.

If You're a Buyer...

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.

 

Deal "Savers" in Tough Times

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.

Comments

    0 of 8192 characters used
    Post Comment

    • businesstrader profile image

      Natalie Watson 

      8 years ago from Sydney, Australia

      I own and run a business for sale site in Australia and even in the tough ecconomic times our advertisers were still finding buyers in a reasonable amount of time.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://hubpages.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)