One of my clients recently asked, “I guess I should have sold a few years ago?” My answer: “Well, yes, but I should have gotten out of my stock-heavy mutual funds, and I didn’t do that. The question is, what should you do now?”
Another client right now is the perfect example of this. He has a solid offer for his company, but his sales and earnings have softened in the last few months. He wondered what that would do to the deal. I said I didn’t know, but that the buyer may want to recalculate the price based on the trailing 12 months earnings. He replied that this was fair, but he and his wife had figured out how much they needed to take home after paying taxes, long term debt and commissions. Below that he would prefer to wait the downturn out. I don’t know if he has really thought out what it takes to wait (especially considering his mind has already moved on to other things), but my guess is that in two years he’ll ask the same question my other client asked, “I guess I should have sold a few years ago?” Unfortunately, I don’t feel I can argue that point too much with clients because very quickly it sounds like I’m pandering for my commission.
Is now the time? Here are some data points that may help you decide:
Are There Buyers?
Yes, particularly if you think a business can buy your business. Individual buyers for small companies are out there, but not in the numbers of a few years ago. Many were using home equity for a down payment, and boy those days are over. But we still get calls from individuals even on larger businesses, so it certainly hasn’t dried up completely. Large companies are feeling the impact more than others, so they are having a harder time. But the lower middle market deals (transactions from $1 to $50 million) are still getting done. I’ll follow up this post with a more detailed post on the very healthy response we got in the past few weeks from a company we just put on the market. In summary, we got well over 100 inquiries from companies wishing more information on acquiring our client.
Is There Financing?
Not as much, no doubt about that. Again, smaller deals with the tightening of SBA guidelines and larger deals with the turmoil in the investment banks are tougher to finance. Middle market deals, particularly when there is real collateral such as hard assets, receivables and inventory, are more likely to get done.
How is Your Business Doing?
Buyers understand there is some softening of revenue and earnings, so don’t worry if you are feeling it to some degree. Almost everyone is. The smart buyers are looking for businesses with a solid foundation, diverse customer base, and a clear position above the competition. Unfortunately, it is pretty hard to sell a business in a strong downtrend, so if you are in that situation you may have to buckle down and ride it out.
As always, it is not an easy decision to sell your company and there is far more to it than I could cover in book, much less a blog post.
Please know that advisors like me (www.woodbridgegrp.com) spend quite a bit of time with clients up front to discuss their options at no charge. We often spend years with a possible client before they actually become one. I know that some business owners feel guilty taking our time when they don’t really know if they want to sell yet, but I would much rather help someone prepare over a longer period of time than sell a company in a hurry.