Friday, May 29, 2009

Is now a good time to sell a business

I was invited to be a guest on the Business Insanity Radio show hosted by Barry Moltz. Below is a brief recap of the topics we covered during the show and click here to listen to a replay.

Given the shaky economy is now really a good time to Sell a Business? Now may be a great time given the sheer number of buyers in the marketplace right now. The number of buyers we are working with compared to the same period last year is up by a factor of three. If your business has solid fundamentals and you have plan, this is the time to talk with a professional intermediary. For example, our firm currently represents a B2B services business that has had flat sales the past two years and slightly fluctuating cash flows. This business has received five offers and this should result in an attractive exit for the owner.

How are you finding the buyers? We are dealing with strategic buyers and individual investors. The strategic buyers see a great opportunity to grow market share and top-line revenues. Individuals, largely the unemployed masses, are looking to replace an income and use this opportunity to gain some control of their careers and futures.

How are deals getting financed? Financing has become our biggest challenge but it may also be an opportunity for sellers. On the challenging side, the banks have almost completely withdrawn from the business acquisition lending market. Many of the banks have made their underwriting requirements so onerous that the bankers are not even bothering with these types of loans. In addition, the SBA implemented an SOP change that went into effect March 1st. It limits the amount of goodwill in a business acquisition loan to a maximum of 50% of the total loan, or a hard cap of $250k, whichever is greater. With our large service-based economy most of our deals easily eclipse the SBA benchmark and, as a result, the banks do not want to deal with these opportunities.

On the positive side, this is an opportunity for the sellers to gain control of their deals by offering seller financing. While there are risks associated with this financing strategy, there can be significant upside, for example: interest rates of up to 10 percent, a first secured position, deferred and potentially lower taxes, and faster transaction times. It is worth saying that the right advisors, with actual experience with seller notes, are imperative to ensuring a good deal for all the parties.

With the right plan and the right advisors, now might be a great time to exit the business.

Wednesday, May 13, 2009


Confidentiality is not just a seller issue. A buyer needs to be very concerned that the sale of a business is handled with care when it comes to employees, clients and vendors. I am continually surprised at the cavalier approach some buyers and sellers take to this critical issue.

A buyer on one of our listings made an innocent, but very disruptive, mistake during the due diligence stage of a deal. The buyer and seller had negotiated a contract for sale and the buyer was reviewing the operational and financial records of the business. During the buyer's discovery process he decided to contact an industry third-party to ensure that the company was in ‘good standing’ and all licensing was up-to-date. Seems like a reasonable step in the process, UNTIL the person the buyer called started to ask questions about who was calling and why the buyer wanted this information.

What the buyer did not know was that the person on the phone knew the company very well and, in fact, several of the employees were his friends. The buyer immediately realized this call was a mistake and he requested that the contact keep the call confidential.

The very next day the sellers arrived at the office to a group of anxious employees. The dam was breached, as the contact at the industry third-party wasted no time in calling his friends at the company.

The business is now at risk. When employees find out a business is for sale prior to the transaction closing they become nervous and their survival instincts kick in. They start to ask lots of questions and this atmosphere of uncertainty can cause them to start looking for other opportunities, become destructive or hold the deal hostage by placing demands on the buyer or seller.

The risks are obvious for the seller. The buyer may also be impacted should they take over a business with disgruntled employees. No good can come from compromising the confidentiality of a business. Any demands during a negotiation to meet with employees, clients or vendors should be resisted or the consequences can be devastating.

Monday, May 4, 2009

No TARP money......No Problem

By now it has been well-documented that the TARP money is not making its way into the hands of small business owners. We continue to see small business acquisition loan requests routinely denied, and even worse, completely ignored by the banks. We sent a small business acquisition loan request to a regional bank and, while they acknowledged receipt, there was no desire to even respond. When we requested feedback we were told that the deal looked real nice and they would get back to us somewhere down the road. Our clients find that kind of non-response irresponsible and appalling. I receive daily inquiries from sellers wondering where all the TARP money has gone. It's a great question, and one we cannot answer.

The apathy shown by the banks could not come at a worse time. There are an enormous number of sellers NEEDING to re-capitalize their business, obtain working capital or sell for some human reason (retirement, illness, burnout etc.) Then, there are the swelling numbers of potential business buyers who NEED to buy a business. These potential buyers are largely middle-to-senior-level executives who have been downsized and the prospect of finding a job looks dim.

The good news is that business acquisitions are possible without the government and banks. In fact, there was a time when banks played a minor role, if any, in small business acquisition lending. So, we now see the market retraining itself on the practice of SELLER FINANCING. In essence, the seller fulfills the role the banks have played, and in the process, gains back control of their goals. For obvious reasons, this form of financing is met with trepidation by sellers. However, with the proper guidance from seasoned advisors, these types of transactions can be more lucrative and provide better security for both sellers and buyers.

One recent transaction will serve to illustrate the need for sellers to embrace the idea of seller financing. We confidentially represented a business services firm in the Chicago area that had a 17-year track record, a stable client base and growing revenues. Our firm attracted multiple buyers and secured an offer from a private investor with solid financials. The deal structure was as follows:

50% - Buyer Down Payment
25% - Seller Note
25% - Bank Note

This business had physical (hard) assets on the balance sheet that exceeded the amount being requested in bank financing. The sellers had a long-standing banking relationship and offered to introduce the buyer to their banker, who was very bullish on this deal. After several weeks of working with bank on what we were told was a ‘slam dunk’ loan request, it was DENIED. The explanation offered by the bank was that they discounted the assets by 60%, an arbitrary amount used by this particular bank, and that this was insufficient to secure a loan. Never mind that the business was well-established, generated significant cash flow after debt service and that the buyers were experienced in the business. Seems implausible, but true! The buyers and sellers were undeterred and we renegotiated the deal with the buyers. We increased their down payment and thus had the sellers fill the void left by the bank.

This type of financing requires tons of creative thinking, experienced advisors and motivated buyers and sellers. In our next blog we will cover both the benefits and pitfalls of this type of financing and how to ensure a successful outcome.