Selling Your Business in a Buyer's Market
November 15, 2010
“FOR SALE: Rapidly growing heating & air conditioning company has been in business since 1921. It is located in a historic rural area about one hour from the Houston area. Company’s continued growth is ensured by its contracts with various county and community associations to provide HVAC services to the elderly, handicapped, and low-income families. Training will be provided. Owner wishes to retire. Real estate valued at $135,000 is included in asking price and may be purchased or leased. Gross income: $799,000; Cash flow: $227,000; Inventory: $25,000; Employees: Seven. Asking price: $680,000.”
This listing appeared in late September on bizbuysell.com. It was one of 39 HVAC contracting businesses for sale. Good price? It’s hard to tell unless a lot more factors are considered. But it is clear that the owner wants to retire and is willing to stay on to train the new owner(s). This scenario is played out hundreds of times every year in the HVAC trade across the United States. And with today’s troubled economic climate, the chances of this seller - and many others - getting their asking price may be affected by the glut of HVAC businesses on the market and the depressed value of these businesses.
A recent survey by BizBuySell.com of business brokers revealed some interesting statistics on the business-for-sale market. According to Mike Handelsman, general manager of BizBuySell.com, “Most business brokers agree that it’s a challenging market, with the biggest concerns being a scarcity of qualified buyers and sellers, financial challenges in getting deals done, and no clear signs of a fast recovery.”
Some of the results of the survey are:
• Scarcity of qualified buyers. Despite ongoing high levels of unemployment nationwide, the majority of business brokers (53 percent) report that they are receiving fewer buyer inquiries this year than they did last year. “The buyers we are seeing are less qualified and are looking for close to 100 percent seller financing,” said a survey respondent. “They assume that most businesses for sale are distressed sales. Most of them are just tire kickers.”
• Challenging market to get deals done. An overwhelming majority of responding brokers (77 percent) indicate that it is taking more time to close a sale in 2010 than in 2009. When asked to identify the No. 1 reason that it is difficult to close transactions in 2010, 49 percent of surveyed brokers blamed the lack of business transition financing. Other challenges mentioned by brokers include seller unwillingness to lower their asking prices (19 percent) and a lack of qualified buyers (18 percent).
• No signs of a fast recovery. In another sign of an ongoing challenging market, over one-half of the respondents don’t see the business-for-sale market returning to pre-recession levels for at least 18 months. “Buyers are sitting on the sidelines waiting for the bottom to fall out,” said a survey respondent. Another added, “Sellers aren’t making as much money, but they don’t want to sell for less.”
SELLING TIPSHandelsman said that in spite of the current market challenges, brokers do see brighter times ahead in 2011. About 53 percent expect to see more closed transactions in 2011 than in 2010, while only 10 percent said they expect to see fewer transactions. “Deals are still getting done, but business owners looking to sell in this market might need to be flexible and share the risk with potential buyers by offering seller financing,” he said.
Handelsman does not want to discourage buyers in spite of weaker financials for selling companies, a lack of confidence from buyers that the economy will improve quickly, and a dearth of capital available to those who want to buy a business.
“Businesses that are performing well can still sell at a good price,” he said. “Whether your business has been struggling through the recession or is still going strong, this might be the right time for you to exit. For business owners looking to sell, there are things you can be doing to improve the odds of closing the deal and to ensure you receive a good price for your business.”
1. Price your business right. It is especially important in today’s market to ensure that businesses are priced right. Pricing a business too high will hurt the ability to sell it and may leave a buyer fighting an uphill battle that only ends with continuous drops in price. Pricing a business too low can cause prospective buyers to either presume that something is wrong with the business or pounce on this mistake, resulting in leaving money on the table that should be in the seller’s pocket. Seek the advice of a valuation professional or a business broker to help establish the right price for the business.
2. Keep your eye on the prize. Selling a business is almost a full-time job, but buyers shouldn’t get so tied up in selling their business that revenues and operations decline in the meantime. It will be even more challenging to sell a business if it appears to be ailing. The key is to make sure that enough resources are focused on both selling the business and running the business to ensure that progress is made on both fronts. The best way to do this is through the use of professionals to support the business sale. Use a qualified business broker, and/or the use of a trusted accountant or attorney to support the transaction and the related financial details.
3. Be willing to share the buyer’s burden. Sellers make their business more appealing to a potential buyer if they are willing to offer seller financing. At a time when capital for business acquisitions is scarce, seller financing gives a buyer a way to fund at least a portion of the purchase of the business. In this market, seller financing can be the difference between getting a sale done or watching the business-for-sale listing get dusty without ever getting an offer.
4. Offer a roadmap to success. Though the numbers point to a market heavily favoring the buyer, buyers are still tentative. This market presents several challenging scenarios that can cause a potential buyer to have second thoughts about purchasing a company. By providing a detailed roadmap to future success in the business, sellers will have a much higher chance of attracting the right buyer and making a sale happen.
To help make the road to success more convincing to a potential buyer, it is advisable to work hard to lock in long-term contracts that can guarantee future revenues. Buyers can supplement this effort by working to sign on one or two more clients so the business is not crippled by the loss of a single client. In addition, success may include putting off investments that have long-term payouts to help cut costs. After all, a buyer will have their own ideas about what investments they do and don’t want to make.
“Given that it can take months to prepare a business for sale, owners looking to sell in 2011 should start preparing to sell sooner rather than later to ensure they get the most value for their business in this market,” Handelsman said. These preparations should include gathering financial documentation, improving company facilities/assets, and en- suring a strong employee team can help a new buyer feel confident of a successful transition.
“It’s a challenging market out there, but that’s not necessarily a reason to hold off on selling. Business owners who are following best practices like these and doing things right are still closing deals at prices that can satisfy all of the parties involved in the transaction.”
For more information, visit www.bizbuysell.com.
Publication date: 11/15/2010