From Fannie and Freddie to rising unemployment and a sluggish growth rate, the economic turmoil continues. As a business owner, you might think this is an impossible time to sell your company and get a strong value. Thankfully, that’s just not so in many cases.

In fact, we’ve closed more deals at Cornerstone in 2008 than any year prior, and Finance Week recently described the Midwest as a “hotbed of mergers and acquisitions activity.”

You can still realize a successful transaction at a good price, if you understand what you need to structure a deal:

First, consider buyer credibility. You need to obtain the best buyer possible, someone who has a good reputation, substantial assets to pledge as collateral, experience running a business, and/or other demonstrated success in an industry related to yours.

With a proven, credible buyer at the table, lenders can more readily support the transaction.

Second, expect to provide some seller financing. To obtain a premium for your business, you will have to share the risks with the buyer and the lending institution.

In most cases when we’re selling a successful business, the value is greater than the assets owned. The difference between assets and fair market value is called goodwill.

In today’s tight lending climate, you can still get a strong value for that goodwill, but the seller has to finance more of the purchase price than before.

In the past, we saw seller financing between 5% to 15%. Now, that number is closer to 15% to 30%.
Those payments are typically structured with something near a 15-year amortization at an interest rate 1 percentage point higher than the lender’s, and a balloon payment between three to five years.

Once the buyers have proven themselves in the business and established a record of consistent debt payments, the bank will generally refinance the seller’s note. As a result, the seller receives full payment within three to five years and the bank gets to lend more money to a demonstrated lower-risk borrower.

We’re still seeing a lot of buyers, despite the turbulent economy. However, as an alternative to these elevated seller-financing rates, a seller may opt to hold the business and wait until the banks return to a more positive lending environment.

In doing so, a seller runs the risk that the capital gains tax will increase and the mergers and acquisitions market could change for the worse.

We’re seeing many owners decide to sell at a good value, but take just 75% to 80% of the cash now—with the remainder due in a few years—rather than postpone the sale.

Owners ready to sell but waiting for the economy to turn should be prepared to spend potentially anotherfour-plus years in the business.

Let’s assume revenue declines in 2009. Many buyers prefer two years of increasing or stable revenues, you’d put the business on the market at the end of 2011.

Expect the sales process to take about a year, and expect to spend six months to a year in transition with new ownership.

If you’re already tired or reaching an age when health issues could impact your retirement, waiting to sell could have a negative impact on your business and your quality of life.

Don’t assume this is the wrong time. Meet with an intermediary to get an honest evaluation of the market andyour business’s potential value. We’re still seeing strong activity in several industries and in the region overall.

Bushkie is President of Cornerstone Business Services, Inc. a lower-middle-market M&A firm serving the Midwest. Contact him at (920) 436-9890 or sbushkie@cornerstone-business.com.

More Featured Articles