You wouldn’t exactly say that now is an ideal time to sell a business. Not only is it harder for buyers to find financing, but valuations are down. The average asking price to sale price ratio fell 6.1 percent in 2009, according to BuzBuySell.com, a San Francisco-based site for buying and selling small businesses. As a result, some potential sellers are deciding to hold off until the economy improves.
At the same time, plenty of small companies are on the market—and finding buyers. The key to success is recognizing just what it takes to sell your business successfully in the current environment. “Today’s tough times call for different measures,” says Michael Handelsman, general manager of BizBuySell.
Here are three important steps sellers should take:
Clean up your house. That’s true in any economy. But in the current downturn it’s especially important to make sure everything from your balance sheet to your physical offices are in good order before putting your business up for sale. For example, go over all your expenses to see if there’s anything more you can cut. Put off investments likely not to have an immediate payoff, such as installing a new software system. And try to renegotiate everything from your lease to contracts with customers to lock in better terms and future revenues.
In addition, “You’ll need three years of well-documented financial history to present to the buyer,” says Handelsman. As a result, be prepared to explain and document the reasons for any notable lapses.
Accept creative financing. Most important is using seller funding, through which you issue a note to the buyer for part of the purchase price. The acquirer would then have a period of time—usually anywhere from three to seven years—to pay you back.
The reason to use the approach: Because banks have clamped down on lending, it’s harder for prospective buyers to get a loan. As a result, while many buyers were able to finance their purchases through a mix of loans and their own capital two years ago, today they need more help from the seller. According to Handelsman, around 25 to 65 percent of the purchase price is now done through seller financing. “It’s almost a necessity in today’s market,” says Domenic Rinaldi, managing partner of Chicagoland Sunbelt, a Chicago based business broker.
In fact, according to Rinaldi, using seller financing can mean the difference between success and failure for sellers. He points to a business services firm that recently offered 50 percent seller financing. It was on the market for all of seven days, received nine offers, and was sold in 60 days. On the other hand, another company with similar revenues that provided no seller financing has been on the market for three months—and hasn’t received a single offer. “I’m sure that the business would have had more success if the owner was willing to provide financing,” he says.
In some cases, you might also have to accept an earn-out. Generally, that means you’ll continue to work at the company for three to five years and will receive a portion of the sale price, as long as the business meets certain predetermined revenue or profit targets.
Provide a roadmap for success. In the current uncertain environment, it’s a good idea to present a case for why your business is likely to succeed despite the downturn. One approach is to write a business plan with steps the company might take over the next one to three years to increase revenues and profits, including anything from marketing initiatives to ideas for new services. Says Handelsman, “You need to paint a picture of how your business can thrive in this market.”