If you own a business you can prepare for the sale of that business by identifying your company’s weaknesses and fix them, or let the buyer take on those challenges. What you decide depends on your energy, finances and what you want to net out of the sale.
Sellers with business advisors, such as Sunbelt Business Brokers, will choose the former course of action and see bigger returns at the closing table.
Nearly all business advisors surveyed (93%) have asked their sellers to resolve weaknesses before going to market. They also get the seller to agree to a price range before going to market, and most (80%) will pass on a listing they don’t believe will meet the seller’s expectations.
This is why business advisors affiliated with the IBBA (International Business Brokers Association) or the M&A Resource (surveyed in the MarketPulse 2016 3rd quarter report) have closing rates exceeding industry averages. IBBA and M&A Resource business advisors had closing rates of 54% in the 3rd quarter survey. In contrast the overall industry benchmark puts the closing ratio at 25% or less.
According to David Ryan, a business advisor with Upton Financial Group in California, BizBuySell.com has 45,000 active businesses for sale, yet only 1,800 close every quarter for a 4% closure rate.
“Our members consistently say that unrealistic price expectations are the biggest barrier to getting deals done,” Ryan said. “By helping sellers understand what is realistic, we’re dramatically increasing their chances of selling and getting a return on all their years of hard work.”
Also business advisors report that Main Street businesses ($500K < $5m) obtained 90% or better of the asking price when working with an IBBA or M&A Resource business advisor. But businesses in the lower middle market ($2m < $5m), which typically aren’t marketed with a list price, receive 96-100% of the internal benchmark set by the seller and advisor.
Ryan added that the time to close also plays a factor in a successful business sale.
“Sellers need to understand that the sale process, from choosing your advisor team to transitioning in a new owner, can easily take a year or more. Those who plan ahead and go to market before they burn out are better positioned to make it to the closing table.”
Why owners are selling
Retirement and burnout lead the reasons why owners are selling. For business values less than $500K, retirement and burnout are equal in driving sales. In the middle market, burnout doesn’t show as a leading factor. Instead, family issues and recapitalization followed retirement as the top reason for putting a business on the market.
“This is the first time in many quarters that burnout did not rank as a top-two driver for the lower-middle market,” said Scott Buskie, CBI, President of Cornerstone Business services Inc. and IBBA Chair. “Exit planning is a hot topic among business consultants now. The uptick in recapitalization could be a indicator that larger business owners are becoming more suavy about their exit planning options.”
Craig Everett, PhD at Pepperdine Private Capital Markets Project, said it is not a good idea for sellers to engage in ‘one-more-year-it is’ right now.
“The M&A market has had a very good run and it’s only going to get worse before it gets better. You just never know when the next bubble will burst, but when it does your business has a lower value the very next day, even if your numbers haven’t changed” he said.
But who has the advantage, buyers or sellers?
Businesses in the smallest market sector are positioned in a buyer’s market, although seller leverage is improving. That advantage shifts as deals go over $1 million in value. But in the lower middle market seller advantage sentiment declined year-over-year, yet remains solidly in the sellers favor.
According to the 2016 3rd quarter survey, multiples remain strong in all categories, holding steady or increasing across market sectors. The lower middle market saw the largest jumps, while businesses valued between $5 million and $50 million increase by only 0.7% points.
“Although activity seems to be down slightly over last year, multiples were notably higher in the lower middle market,” said Lou Vescio, CBI, M&A Principal with Coastal Business Intermediaries, Inc. This shows sellers who are moving now are getting ahead of the curve and taking advantage of supply and demand conditions. There are fewer sellers than buyers in the lower middle market.”
Sellers also continue to get a majority of cash at close: In the 3rd quarter, sellers received 76% or more cash as close, with the majority balance being seller financing. Seller financing amounted to at least 10% of financing across all market segments.
“This is not like selling a house and getting all your cash at close,” said David Still, CBI, President of Capital Endeavors, Inc. “Sellers need to go into the sale process with their eyes wide open. They need to provide some level of buyer support.”