Economic clouds tint efforts to sell small businesses

The first baby boomers turn 67 years old this year. If they own a business, the pressure to exit or sell is increasing. “The Market Pulse Quarterly Survey Report” for the last quarter of 2012 shows, for the first time, baby-boomer retirement was the No. 1 driver of sales of businesses selling for less than $5 million. That trend will only increase as the boomer generation surges toward retirement.

The study, presented by the International Business Broker Association and M&A Source and compiled by the Pepperdine Private Capital Markets Project, analyzes the Main Street market (values less than $2 million) and lower middle market (value $2 million to $50 million). Let’s look at sales of $5 million and less.

The second most common reason for business sales was burnout for Main Street businesses and family issues for the lower middle market. The four-year economic downturn has created the perfect storm of selling pressure because many owners who intended to exit sooner instead held on, hoping value and, thus, prices, would increase as the economy improved.

It appears the market may be improving. Brokers and mergers and acquisition advisers expect transaction activity to increase in 2013 stemming from boomer retirement. This retirement pressure will undoubtedly increase the number of businesses for sale.

Main Street transactions were clearly in a buyer’s market last year. Brokers predict a more level playing field this year. However, I suspect this is wishful thinking because more businesses will be for sale and buyers will remain cautious.

Also, bank financing likely will remain tight, making it difficult for buyers to obtain financing. It takes time for business transactions to close. Slightly more than half of Main Street transactions sold in six months. Figure in the time needed to prepare a business for sale, and the retirement and burnout pressure will continue to build.

Selling prices stayed the same or declined slightly in the fourth quarter of 2012. Main Street businesses sold for 1½ to 3½ times the seller’s discretionary earnings, or SDE. SDE is essentially all the earnings (cash or benefits) available to the owner before taxes and loan payments. Lower middle market firms sold for 3½ to 5 times earnings before interest, taxes, depreciation, and amortization, or EBITDA and after an owner’s salary.

You must be prepared and proactive if you expect to exit within the next year or so if you want to sell at a higher price. The most important thing you can do is put your books into pristine order. Your records must be accurate and transparent to attract and retain the best prospects. Motivated buyers with lots of cash have many options, and you must be prepared to compete for them.

Your business should be highly profitable and growing. If not, be prepared to explain the reasons and to expect a lower offer. Work with your advisers to gain realistic expectations. Try to keep emotions in check and deal in a straightforward manner. This is not the place for exaggeration. Time is not on your side if you are older or burning out. Dan Bowser is president of Value Insights Inc. of Durango, Chandler, Ariz., and Summerville, Pa.