Why You Should Sell Your Business Now

Here's the bad news: This is not a great market for business owners hoping to sell a small business. At least, the market is not what it was back in 2007, before the recession.

Here's the good news: The market today is much improved from its woeful state of the past few years -- and likely much better now than it will be in years ahead.

The window of opportunity is swinging open. Revenue is up at many U.S. businesses (which makes it easier for owners to attract buyers) and credit is loosening (which makes it easier for buyers to make a purchase). But a variety of forces could push the window closed in the near future.

In other words, if you're a business owner and you're looking to sell, now could be your last best chance.

"For a number of small business owners who may be ready to sell their companies, the past few years have been a time to cut expenses and wait for the market to rebound. There simply was no use trying to sell a business when revenues and profits were down," says Mike Handelsman, general manager at BizBuySell.com, an online business-for-sale exchange. "But in the second half of 2010 and [currently], people are feeling better about exiting."

Handelsman says BizBuySell analyzed 4,568 closed transactions nationwide in 2010, an increase of about 3 percent over 2009. The number is up for several reasons, chief among them the fact that revenues are finally climbing out of the trench.

"People are starting to make money again. There's a glimmer of hope," says Andrew Cagnetta, CEO of Transworld Business Advisors, which markets and sells businesses. "If you're selling a business and you did well in 2010, you've gained your value back, because true valuation is future earnings. Increasingly, you can sell on the strength of the last quarter of 2010 and first quarter of 2011."

Another reason business sales are up is that there are more buyers in the market, many of them laid-off executives who are looking for something new to do. "There's considerable demand in the marketplace for successful businesses with a consistent record of earnings, a lot of it from displaced corporate executives who are seeking an acquisition of a small business as a replacement income stream," says Michael Fekkes, a broker at Enlign Business Brokers.

Baby Boomers Are Heading for the Exit

So who is selling? A lot of them are baby boomers who want to retire, even if they have to accept a lower price for their businesses to do it. Joseph Caffrey, president of Worldwide Business Brokers, says that, despite the growing demand in the market, prices are not rising because supply is also on the rise.

"We've seen traffic increase on the buy side, and you'd think this would cause the valuation of businesses to increase. But that hasn't happened because we've seen a demographic trend of more sellers in the market, particularly baby boomers who are looking to retire. So there is steady increase in buyers and sellers."

For now, prices are holding up fairly well. Handelsman says that in deals recorded by BizBuySell in 2009, the median sale price was $160,000, with buyers paying an average 0.67 times revenue and 2.59 times cash flow. But in 2010 prices showed a slight decline, settling at a median sale price of $150,000 and an average of 0.66 times revenue and 2.58 times cash flow.

As more baby boomers eye retirement and look to sell their businesses, this trend is likely to accelerate.

"In 2011, the oldest of the baby boomers start turning 65," says Enlign's Fekkes. "Of the approximately 83 million of them, many are business owners and many will be looking for exit strategies over the next five to ten years. Supply and demand will surely apply, and as supply increases, demand will likely remain consistent with prior periods. Business owners who list earlier in the cycle should receive higher multiples as a result of being on the favorable side of the supply-and-demand curve."

Federal policy also favors owners who sell now. As part of its effort to defibrillate the economy, the Obama administration's $30 billion small business aid plan makes low-cost loans available not only to business owners, but to buyers who want to purchase small businesses.

But the government knows it will have to pay for all its spending in the years ahead, and it will do that in part by raising the tax on money derived from a business sale. "Barack Obama has said he'll support raising the capital gains rate to 28 percent from the current 15 percent," Fekkes says. "What this means for business sellers is that money allocated to goodwill will be taxed at 28 percent rather than 15 percent, paid entirely from the seller's proceeds. Those considering a sale in one to two years might elect to move up their time line to retain more of the proceeds by selling before an increase can be enacted."

How to Make a Sale Easier

If you are thinking about selling a business now, there are ways you can increase your chance of success -- and your profit.

For starters, you can offer financing. In fact, this is now just about required of any small business seller, says BizBuySell's Handelsman. "Seller financing is essential. Prior to the recession, banks were overly aggressive about who they'd lend to and how they'd lend, so the seller could walk away with an all-cash deal. Today that's almost impossible. Banks won't lend unless the seller has some skin in the game."

Typically, this means the buyer will put in a third of your price, the bank will add a third, and you'll have to finance a third. Buyers and banks prefer this arrangement because it means you have a vested interest in your business continuing to be successful. You'll be required to take a percentage of the sale price in the form of a buyer note that the buyer will pay back over time, with interest. The buyer and lender will also expect you to participate in the transition to help get the new owner off to a good start.

Take the case of Wayne Ray, owner of Carolina Carriage Golf Carts in Pinehurst, North Carolina. Although he's 72 now and would like to sell his business outright so he can travel, he realizes that in order to make his business more attractive to buyers, he'll have to stick around to ensure a smooth transition.

"I'm promising to stay on for one year as a consultant," he says. "I won't operate it, but I will help with the ins and outs, like dealing with the manufacturers. This business took me 18 months to figure out, so this gives great peace of mind to buyers."

Ray also advises sellers to take pains to maintain clear and transparent accounts so buyers can easily tell what your revenue and profit are. He's kept profit and loss statements by line item by quarter for the past 12 quarters.

Handelsman agrees, advising sellers to have a minimum of three years' documentation available, including tax returns, expense records, revenue, and cash flow. You should also have realistic expectations, he says. He still sees sellers setting a sale price based on 2005-to-2008 cash flow, which no buyer will accept these days. "Expect an improved selling environment in 2011, but don't make the mistake of asking a prerecessionary price."

To determine an accurate price for your business, he recommends you first find out what other businesses in your field have sold for. Two online resources are BizBuySell and BizQuest. You can also buy a valuation report for details on recent sales in your area.

Then, when you're ready, hang out the for-sale sign.

The window is open, but it won't be for long -- and you don't want it to slam on your fingers. Cagnetta of Transworld Business Advisors tells the story of a client who had a $5.5 million all-cash offer from a public company in 2007 but hesitated. "Today, her business is worth $2 million tops. There are a lot of people like her who wished they had sold three years ago."

Consider your options carefully and make the right decision, and you won't be wishing the same thing three years from now.