Selling a business can be a very stressful experience and there are a lot of moving parts to mind to get the highest price for it. Thankfully, the market is beginning to recover and if the business for sale is in the black there are buyers who are interested. BizBuySell.com reports that business sales are up 1.2% compared to last year, and analysts believe that number will increase throughout the rest of the year since more business sellers are setting realistic prices and making the effort to clean up their books and streamline effectiveness prior to putting their companies on the market. For more on this continue reading the following article from TheStreet.
Are you ready to sell your business? Do you have plans to pass your days sitting with your toes in the sand, touring Europe, or even, buying and running another business?
Selling your business, like selling a home, is one of those really stressful times in your life, but if you’re prepared and have realistic expectations, even in this economy, it doesn’t have to be a disaster. Getting your company sold seems to be marginally easier this year, too, as the economy slowly recovers. So if you have a good business model and a company that’s making money, there are buyers in the market.
"People have sat back long enough … older senior executives are not getting rehired at the level they were at, a lot of people are [being] underutilized. So you’re either going to deal with that or find a business to buy," says Roger Murphy, president and CEO of Murphy Business & Financial Corp., a business and franchise brokerage firm in Clearwater, Fla.
"People were afraid to buy a business because businesses were failing. Buyers weren’t buying and sellers weren’t selling. My business through May was up 64% in business sales. That tells me that people have stopped waiting on the sidelines and we have this pent up demand," he says.
Businesses sold year-to-date are up 1.2% as compared to 2011, according to the latest quarterly report by BizBuySell.com, a marketplace for buying and selling small businesses.
The report, which analyzes transactions completed through BizBuySell’s service, says small businesses are financially healthier than last year, given improved business revenue and cash flow. Businesses had median revenue of $360,000, up from $340,000 in the second quarter of 2011. The median annual cash flow for a business sold was $86,508, an improvement from $85,000 the year before, says BizBuySell.
Owners are also setting more realistic asking prices for their businesses. The median asking price for the second quarter was $236,750, down slightly from $239,000 in the 2011 comparable time period.
As a result, BizBuySell expects to see transactions rise throughout the rest of the year — partly as financing becomes marginally more available but also because small-business owners might be pushing their timetables forward to avoid the expected rise in capital gains tax rates next year due to the expiring Bush tax cuts.
The total number of businesses that were sold in the second quarter did dip as compared to the year before. The report says that 1,603 business sales closed in the second quarter, a 1.6% drop from the same quarter last year.
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"This is a characteristic of the recovery we’re in. It’s a very slow and bumpy recovery. It’s still a challenging market to buy or sell a business," says Mike Handelsman, BizBuySell’s group general manager.
Another trend that has become more prevalent is a strategy known as seller financing.
Five years ago, if you wanted to exit a business and retire to Florida, you could do so with all cash. Now owners will be lucky to get half the money up front and hope the business will be run well under the new owners in order to get the other half of the money in five years, for example.
Banks are "only lending to the absolute cream of the crop," Murphy says. "They are very difficult to get. They require better credit, knowing the buyer better, more money down and usually seller financing."
That’s why experts agree that the first thing sellers need to do is to prepare at least two to three years in advance of a sale.
"You want to sell a business when it’s doing well, you don’t want to sell it when it’s going down the drain," Murphy says.
That means having a tight handle on your financial situation and clear and documented business processes. The less documented these measures are, the less confident a buyer will be in your business, which will lower the sale price.
Financial records should show maximum profit. The higher the profit, the higher the price. So if you’re thinking of putting a portion of profit into a life insurance policy or paying for a car through the business, hold off on that.
"Get rid of all that stuff and clean up books and records," Murphy says. Certainly don’t spend money on unnecessary items or perks, but even things like sponsoring the local little league team or donations to charity, when preparing to sell keep it to a minimum, if at all, so that you can prop up profit, he says.
The business also won’t get many offers if the model is so dependent on the owner, a key customer or supplier that it can’t be detached from it.
Businesses that tend to be more appealing to buyers in this market also have a higher level of tangible assets. As a result, they are easier to get loans for because there is more collateral, such as real estate or equipment.
"Sellers are often enamored with their own business," Handelsman says. "What’s often most surprising is they think their business is worth more than it really is."
"The reality is businesses sell based on the cash flow. Period. [There are] some intangibles like a loyal customer base, strong brand name, good relationships with suppliers, but for the most part most business are going to sell on a multiple of cash flow," he says.
Particularly post-recession, buyers want to see residual revenue, which is worth more to a buyer than a business model that is forced to consistently acquire new customers.
"The more that it costs you to acquire a customer the more valuable that customer becomes and the more important that you retain that customer for continued business. That is a significant indicator of value in the business," says Dr. Alex DeNoble, head of San Diego State University’s Entrepreneurial Management Center.
DeNoble cautions that there are many questions a business owner looking to sell has to consider in attempting to mitigate the risk of eroding the value of their business. Is there the possibility that competitors can take customers away? Is the business shaped around one particular customer or employee? Is the business run on sound systems such as customer-relationship management or cash flow management systems?
Many business owners place "too much focus on the top line and not enough on what it takes to run the business properly. When there is so much of a focus on sales it can tend to take your eye off of the ball with respect to what it takes to convert the sale to profitability," Dr. DeNoble says.
Many times business owners will want to use a business-specific broker to handle the sale. The broker can help market the business and appropriately value it. Keep in mind that until a sale is complete, it’s best to keep quiet. A potential sale could scare off employees, suppliers and customers.
This article was republished with permission from TheStreet.