How do you sell a distressed business?
As the Great Recession in the US starts to heal and spread through the economy, many business owners are looking to sell their business and regain control of their lives. For different reasons, the recession has been longer and deeper than many imagined, one of the main reasons why Chairman Bernanke at the Federal Reserve keeps saying he will not be raising interest rates for the ‘foreseeable future’ as he wants to make sure the growth in the economy is permanent and not temporary as happened during the Great Depression.
Despite the return to growth in the economy, a lot of business owners are unable or unwilling to hold on to their business in the hope of getting a better price if they sold. At the moment there are many buyers for certain types of businesses but I am seeing these buyers look for bargains. I am also seeing many business owners saying “Get me out, I am done.” They are highly motivated to sell rather than close the business as they want to see their business survive and feel a new owner with marketing money and energy can make it thrive and the price they want is extremely reasonable, that is, just the value of the assets.
If you own a business and want to sell because the physical, financial and emotional price is too great here are some steps to take.
The first step is probably the most important. It’s critical to step back from the business to be clear where it is at. If sales are declining rapidly then that business will be very hard to sell. If sales are flat then that is good. If sales are starting to increase that’s better. To help with this step, look at the cash flow. If a business has positive cash flow it has so many more options to a business that has no cash flow and/or no chance of this improving.
The second step is to look at the finance in place. If the business has no loans, that is great as the assets can be sold free and clear. If the business has loans from family and friends, it is time for heart to heart discussion about who gets how much. If the business has loans from a bank it can be well worth having a discussion with them. Take care with this approach as you need to be sure the bank will partner with you. Banks are in the business of lending so talk to their Asset Protection manager whose job is to protect the interests of the bank by getting bad loans off their books.
The third step is to move forward with selling the business. As I mentioned above, the sale will be around the hard assets. As the seller of the business you may be tempted to think there is value in customer lists, software, a website or the business phone numbers but the reality is these assets are not producing enough cash from the business sales. Do not get me wrong, a buyer will want them but they will not be willing to pay for them; only the hard physical assets or fixtures, furniture and equipment.
Make a detailed list of all the fixtures, furniture and equipment so you can clearly show a buyer what you have including the make, model, date of purchase and any other positive points you would like to make.
Step four is to start marketing the business and the assets. This is probably the hardest part. If the business has employees you do not want them to find out the business is for sale as they will likely fear their job and leave. Customers will be unsettled as well. The other party to worry about is suppliers. If their current terms include credit then they move to require cash only on all sales, so care needs to be taken.
If a suitable buyer comes along, it will be important to run the sale through an escrow company. This protects all parties in the transaction especially the buyer as they want to acquire the assets free and clear.
The process to sell a distressed business can be beyond the skill set and patience of the owner and there is a need to find expert or professional help. There is a cost to this professional help but it can be minimized and pushed to the end of the transaction so they only get paid if the assets are sold. Depending on the business, there may be options such as the expert taking an equity position that does not cost money. The critical step is to find the right expert that can evaluate the business and offer a viable solution.
The place to look for an expert includes any association in your particular industry. That is, if your business is in the auto repair industry or manufacturing industry, check with your association to see if they know any experts. There are two associations that have consultants that work with businesses in distress. These are the Association for Corporate Growth and the Turnaround Management Association. To find a local contact in your market, simply do a Google search for these associations and see if you can find a local chapter and a point of contact to call and ask for help.
The biggest challenge for small business owners and a business in distress can be the owner themselves. The emotions of being overwhelmed with what to do, accepting the reality of the situation, but not being too critical of themselves, that is, seeing it as a failure and being concerned about what to do if they owe money to family and friends. The situation also puts stress on their immediate relationships and simply adds to the negativity of the situation. However, selling a distressed business is now about the future of the business including its customers, employees, suppliers and a positive legacy of seeing the business move from survive to thrive.
Are you thinking about selling your business? Would you like to know the value of your business? If you would like more information please visit my website Business valuation.
For more immediate help you are welcome to send an email to Andrew Rogerson or give me a call on 916 570-2674.