Uncertainty rules the day during this global pandemic with no concrete end in sight. Economies have been devasted with unprecedented unemployment and an underlying fear for those who are lucky to still have gainful employment. Dreams have been put on hold and nowhere has this been more evident than for business owners who had planned to sell their business in 2020. We see business owners sitting on the sidelines wondering when this crisis will end and when and if they will be able to sell their business, assuming that they have been able to remain in business. How long must they remain on the sidelines and will their business retain any of the value they have spent years, and in many cases, decades building. The answer may be surprising – it is indeed a good time to begin with Selling your Business.
A significant number of small businesses which have closed their doors for months are likely never to reopen. However, those businesses which have continued to operate, albeit producing less profits than in previous years, may find it surprising that the value of their business may not have dropped and that an active business sales market does in fact exist. Why should you consider beginning the sales process?
- How long does it take to sell a business? In normal times the selling process takes between 5 and 9 months. It does not take 9 months to close a transaction but depending on the type and quality of the business it may take 4 to 6 months to locate a qualified buyer. The balance is the time from Letter of Intent to the Closing table. This means that waiting for times to return to normal (however defined) in 6 to 12 months may push your exit into 2022. Why not begin the process today?
- Has the value of my business fallen? For businesses which had strong and consistent revenues and profits prior to March of 2020 it is highly likely that when the pandemic has passed their business will return to normal and they will attain the same performance as before. What does this mean for the value today and is it possible to Sell your Business in the near term without losing your shirt? The financial and operational performance of virtually all businesses has been impacted. Many businesses have seen a surge in revenue and profit during this period. Does this mean that buyers will place a premium on the value of these businesses? Conversely, does this mean that businesses which remain fundamentally strong but who are weathering performance declines will experience a decline in value? The answer in both cases is no. Just as we have looked back at turbulent times (World Wars, Political Unrest, Stock Market, etc.) as one-time events this too shall pass, and we will return to what we like to call Normal. This means that the increase in revenues experienced during the pandemic will likely fall when normalcy returns, and decreased revenues will once again return to historical norms. Good businesses with strong foundations and consistent performance remain in high demand. Buyers will not pay a premium for a one-time increase in revenues knowing that it is not sustainable just as savvy buyers know that historically and fundamentally sounds businesses which suffered a one-time decline should not be penalized from a value standpoint. If you as a business owner are confident that the business will return to it’s historical value and you need or want to sell without leaving value on the table now is the time to begin the process of selling your business.
- We know that when supply exceeds demand prices tend to fall. Businesses owners whohad planned to sell in 2020, but have thought it made more sense to wait a year will face increased competition in that they will be competing with owners who set 2021 and 2022 as their targeted exit date. This will result in more businesses on the market in 2021 – all competing for the same group of buyers. We expect that demand for businesses will remain steady but sellers will be competing with a glut of other businesses and that is likely to depress prices. Why wait to compete in a market with falling prices when savvy buyers are waiting in the wings to act today?
- How are Main Street and Lower-Middle Market businesses valued? Prices have always been priced on their historical cash flow. Once we remove the one-time blip of increased or decreased financial performance the value of the business can easily be determined. If today’s crisis has forced you to make your business more efficient and these changes are now the new norm your business is highly likely to be more profitable in the years to come. That is good news for buyer and seller alike. Buyers will be getting a business which is positioned to enjoy increased performance in years to come.
- Transaction Structure is critical. In the heady business transaction markets of 2016 to 2019 – and the first 2 months of 2020, business owners could expect to walk from the closing table with a significant amount of cash with perhaps 10 to 20 percent of compensation deferred to future years associated with Seller Financing. Business owners who were convinced (and convinced their buyers) that their business would enjoy significant growth in the years immediately post-sale were able to realize a higher selling price through the use of Earn-outs and in the parlance of SBA lending;forgivable Seller Notes. Quite simply, buyers agree to pay a higher price if the business achieves the projected growth which sellers were confident of. Earn-outs will become an integral part of business sale transactions in the years ahead. This is good news for sellers and great news for buyers who will enjoy owning a business with accelerating financial performance but who will only have to pay for that performance when the growth is achieved. The risk to the buyer is minimal and the upside to the sellercan be significant. But, waiting until the market becomes more competitive will negate this opportunity as increased competition will depress prices.
The pandemic has negatively impacted our society in unimagined ways, especially for small and medium sized businesses. However, when it comes to asking ‘is this the time to Sell My Business?’, clear thinking should prevail taking into account the overall sales process and the impact that increased competition has in any market. Savvy business owners should not be waiting on the sidelines anymore. The time to act is upon us.
Rocky Mountain Business Advisors is a business brokerage focused 100% on selling our clients’ business. We apply a proven process to educate, prepare, and guide our clients through the sales process so that they can focus on managing their business while we focus on a successful sale. We bring a strong sense of urgency and tenacity to every engagement to realize the highest sales price in the shortest period of time. We bring buyers and sellers together. Contact us at 303- 474-5582, https://rockymountainba.com/, or schedule a free 15-minute consultation and enjoy our services that makes us the finest business brokers out there.