I received an email from a business owner that has been
affected by the downturn in the housing market.
As you can imagine, it isn’t just developers and builders that have felt
the impact. Many businesses that are even
remotely related to growth in housing are seeing declines in revenue and
earnings – and business value.
The person that wrote the email almost sold the business a
few years ago, but the offer was a little shy of what they wanted and the
business broker suggested they wait for a better offer. Now the revenue has dropped significantly and
they still wish to sell if at all possible.
Or should they wait?
Well, first, they shouldn’t feel TOO bad that they didn’t
sell at the top. You can’t usually just
walk completely away from a business.
Most sellers carry back some type of note (An SBA lender often requires
some seller participation in the financing), and as you can guess, that is
usually the first note that doesn’t get paid.
In fact, some SBA lenders have been requiring a “standby” agreement in
which the seller agrees not to take payments on their note under certain
conditions. In other words, if you had
sold at the top and the business then declined significantly, the note payments
to you may have been stopped – maybe for good.
In the current market, there isn’t any question that this is
a hard time to sell many types of businesses.
I talked to a business broker that has an electrical contractor and a
door company for sale. They have been on
the market for some time with little response from potential buyers. It isn’t hard to see why. Would you want to purchase one of these
companies right now? Probably not. I’ve had three calls from sizable mortgage
brokers that wished to sell their companies.
I politely declined to represent them.
Remember that the value of the business is fundamentally dependent
on future earnings. If there is
substantial risk on those earnings, the value will suffer.
If you truly wish or need to sell in this market, you may
need to reduce the price to not only cover the decreased earnings, but also the
risk of future declines in earnings. Another way to look at it is this way: you will receive a lower multiple on earnings now because of risk. A seller can
also reduce the risk with a note with language added that allows the buyer to
skip or waive payments should certain revenue thresholds not be met. Not
many sellers are willing do to this because there isn’t a good way
to discern whether it was the market that caused the decline or the new buyer’s
If you feel the business has “corrected” and is now stable,
you may want to stick with it for 24 months, or at least 18. It typically takes that much history to show a buyer
that there is some stability.
For larger companies there may be some merger opportunities, even with a competitor that has also been impacted.