What’s happening with the sale of privately held businesses?
At the beginning of May I flew to New Orleans to attend the conferences of two associations I am a member – the International Business Brokers Association (IBBA) and the M&A Source (MAS). The IBBA conference is for Main Street business intermediaries or business brokers who focus on the sale of privately held businesses that do up to $2 million per year in gross revenue.
The MAS conference is for lower middle market intermediaries who focus on transactions of privately held business that do up to $50 million per year in gross revenue.
Each conference has several focuses, but I enjoy attending as there are many updates and workshops about what’s happening in my industry; the sale of privately held businesses plus it brings together intermediaries from across different US geographies and even some who travel from other countries.
What’s happening with the sale of privately held businesses?
Both the Main Street market and lower middle market are strong with both sellers wanting to sell and good interest from buyers that wish to buy. It’s not all good news and so here is a summary of observations from both the presenters at each conference and from talking to other attendees.
- Although there is good buyer interest for businesses for sale, buyers are cautious and don’t move quickly.
- There are two primary types of buyers.
- The first type of buyer is a Main Street buyer who wants to buy a business rather than be an employee. That is, they are an individual that wants to own and operate their own business.
- A lot of Main Street buyers are interested in buying a business, but a lot of Main Street buyers are unqualified.
- They are unqualified because they don’t have enough money for a downpayment and therefore the ability to qualify for a loan.
- Additionally, the 2008 – 2010 Great Financial Recession hurt the credit of a lot of buyers and this is following them.
- The second type of buyer is a Private Equity Group (PEG)and their focus is on lower middle market businesses.
- PEG’s have money to buy a business; that is, cash, but they are very selective.
- They have assembled acquisition teams with an investment thesis and looking at lots of opportunities but the number of businesses they buy is very selective and they are not looking to overpay.
- A lot of PEGs also have a focus on a niche and this initially encourages their interest, but they fall away if it doesn’t fit their narrow niche and investment thesis.
- In a lot of cases the PEG wants the seller to stay for an extended period; which is not what the seller wants to do.
- Often these buyers present themselves as cash buyers but then switch to requiring the seller to carry a Sellers Note.
- A lot of PEGs are unwilling to compete against other buyers and so quickly drop out of negotiations.
- There is also interest from overseas buyers; especially China. They too are very selective and sometimes make it hard when negotiating due to cultural and language issues.
- Business valuations are, at best, reasonable. In 2006 and 2007 the value of some businesses in some industries morphed into ‘bubble’ territory. This isn’t happening at the moment.
- Real estate values are mixed. Some values are moving higher depending on geography and their market segment. For example, some California markets such as Los Angeles and Orange County as well as the San Francisco Bay area are high. However, if the industry is retail then values are low.
- Presenters at my conference included highly qualified legal and tax professionals. One tax professional said the best legal entity for a new buyer to form if they planned an acquisition was a C Corporation. Another tax professional said the exact opposite.
Is it the right time to sell your business?
With all the activity in the market, as mentioned above, it is a good time to test the market to see if there is interest in selling your business. If this is something of interest to you consider the following:
- Money is moving into the Stock exchange. This means economic activity is good and buyers are confident.
- Unemployment rates are historically low. This means there is more security for an employee that wants and has a job.
- Interest rates are going up. Higher interest rates will, at some point, force the markets to correct.
- US pubic debt is moving to record highs. Another indicator that will continue to move interest rates higher.
If you are ready to sell your business don’t try to time the market
If you are thinking of selling your business, its probably the right time. Here are some factors to include in your thought processes.
- Selling a business is never about getting all things right. It’s a matter of getting most things in place and then seeing what the market has to offer.
- Just when you think you are now ready, it may be too late as the factors that allow a sale to occur are outside of the control of the buyer and the seller. Don’t forget, a buyer will consider paying based on the previous historical performance of the business, but they won’t buy the business unless it has potential. Who puts money into the Stock Exchange when they believe the market is going down?
- What’s important to you? If continuing to own and operate your business is important to you; continue to do that. Selling a business is about letting go and focusing on new and more attractive opportunities.
- Business valuations haven’t gone up.
- Are your financial statements up to date and accurate? If not, you will be unable to sell your business.
- As they say, all politics is local. So too is buying and selling a business.
The place to start will be with a business valuation. In order to prepare a business valuation for you it will be necessary to provide the tax returns of the business for the last 3 years, a current Profit and Loss and a recent Balance Sheet.
Is it time to sell your business? If so, give me a call on (916) 570-2674 and let’s have a chat.
