INVESTORS WEREN’T THE only losers when the stock market crashed last September. Business owners also watched their company valuations plummet.
Timothy Butler, the president and chief executive of Tego, an RFID chip maker in Waltham, Mass., saw his firm’s value fall quickly with the market’s downturn. Moreover, the recession spooked venture investors. Before the crash, Butler had expected to land investment funds in the range of $1.5 million to $2 million. Instead, he says his firm wound up with just a third of that amount in its coffers.
“It was a very difficult time,” Butler says. “We reduced salaries temporarily. We had to cut certain projects and renegotiate the timing and paying of creditors. And we had to rewrite our business plan to recognize current realities.”
Many firms turned to equity financing during the downturn to make up for their cash shortage. That solution can help keep a business afloat, but each time this type of funding is raised, a company must be appraised, says Jeffery Sohl, the director of the University of New Hampshire’s Center for Venture Research. If owners revaluate their companies when values are lower, they may have to hand over more ownership in the company because the same amount of money buys more when values sink, he says.
In an effort to shore up his firm’s valuation, Butler decided to forgo traditional equity financing. Instead, he issued convertible debt, which is seen as less risky than regular equity investments. The strategy has paid off. Since February, Butler has managed to raise $1 million in debt financing.
Butler was able to avoid a lower valuation, but many other business owners — especially those who are older and angling for retirement — haven’t been so lucky. In the second quarter, the median sale price for completed business sales dropped 20% to $160,000, from $200,000 the year before, according to BizBuySell.com, a web site that tracks business sales. “There’s no question that it’s a challenging environment,” says Anthony J. Citrolo, a principal at New York Business Brokerage, a business brokerage firm in Melville, N.Y. “If the last three or four quarters haven’t been great, some owners [looking to sell now] will have to accept about 12% to 15% less than what they would have gotten a year ago,” he says.
Still, low valuations aren’t impossible to overcome, says Citrolo. In fact, they might even benefit some business owners, he says. Here are three ways to sell your business when values are low:
Keep it in the family
For business owners who want to keep their companies in the family, now may be an ideal time to hand over the reins, says Matt Painter, a tax partner at LBMC, an accounting firm in Brentwood, Tenn. The total amount any one person is allowed to give away as a gift, tax free, over his or her lifetime is $1 million. So at this point, business owners can effectively give away a larger percentage of their businesses because valuations are lower, Painter says.