Selling your business during a recession
Nov 6, 2009 | Download this article (.PDF)
So you have finally decided to sell your business. But alas, the economy is facing the deepest recession since the Great Depression. Banks are making it tougher to get loans for working capital, let alone money to purchase a business. What should you consider when approaching a sale?
Understand the environment
The environment has never been worse. Your sales and profits are down and you are unsettled about the future. Your natural reaction might be to cut costs, reduce discretionary expenses and try to ride out the storm in the hopes of finding a buyer. Then your buyer comes in and sees a smaller business along with a weak balance sheet and lower earnings.
If you want a sale to be successful, then think like a winner. To win, you need to invest in your business. You must grow, or at least try to maintain as much as you can. You have to run your business like your life depends on it, which by the way, it actually does. Realize that most people are pulling a blanket over their head and hoping to ride out the storm. Remember, hope it not a strategy.
Think of yourself as a buyer. Does a buyer want a business that is a shell of itself, or does he want great potential for the future? The answer is obvious.
Reengineer your business
Turn your business into a lean, mean fighting machine. As for operations, you need to cut excess to the bone. This means making tough decisions about excess production, inefficient sales and unnecessary overhead. When business was good, business owners accepted salespeople who were just marginally productive and office staff who were not pushed hard. They put in place additional fixed cost programs to attract and retain personnel.
Make a decision to reduce administrative overhead by 25 percent. This means eliminating one out of four staff. Figure out what work really needs to be done and cut out the rest. Then ask for more from the staff that remains. Working hard and keeping your job is a best case scenario for your staff. If you need all of the personnel, then implement cost savings moves such as eliminating overtime and mandating a furlough day every other week. Eliminate weak salespeople and give that business to a strong producer. Alternatively, convert your weak performer to a completely incentive-based plan so that pay has to be earned with production. If you need someone new, then go get them. There has never been a better environment for upgrading your personnel.
But not everything is about slashing your business to the bone. The changes are about making your business a better operation. Invest in technology that reduces overhead. Better and faster computers and systems make your business more valuable. Outsource full-time jobs with part-time replacements. Many companies have successfully replaced high-cost chief financial officers with an outsourced CFO; they’ve also relied more heavily upon their CPA firm for financial information. For human resource managers, consider using a professional employment organization. Remember that for the time being, you are reducing your workforce, not growing it.
Invest in sales and marketing to make your business stronger. Do not accept the status quo. It has never been a colder, crueler world. You have the opportunity to position your business to hit home runs coming out of this downturn. The future buyer of your business will appreciate this.
Presenting the best picture
Now that you have taken the steps necessary to make your business as good as it can be, you might find you really do not want to sell. After all, the business might be more profitable and efficient, and not the headache it used to be. If you do choose to go forward with a sale, you need to consider what a seller is focused on. Your business is not worth a multiple of prior year sales or earnings, although that is where the thinking starts for many. Your business is worth what it will make in the future.
Of course it is hard to say in this environment what your business may earn next year and in the future. What will be the new normal for your business? You need to run forecasts with the business in hand, highlighting the changes that you have made to the overhead, marketing and sales structure. Based on these changes, your business has its baseline earnings on where you stand today. Then show alternatives with the increased profitability with sales levels.
Now it is time to make a deal
There are three points to consider at this point in the process:
First, you have to be prepared to accept real value, and that number is less then you ever thought. Despite your best efforts, the market is depressed, buyers are scarce and sources of funding for a purchase are more difficult than ever. Set realistic expectations. Selling your business is no different than selling you house in today’s market: recognize that it is worth much less, and move on.
Second, you have to be creative. You can get a higher price if you share in the risk. There are two methods to accomplish this.
- You can take back seller financing. Get as large a deposit as is possible, but take back the financing yourself. By taking the risk of seller financing, you have made it easier for a buyer to make the deal happen at a higher sales price.
- You can negotiate an earnout based upon success of the business. Try to have the earnout structured based upon a simple formula such as a percentage of gross sales or gross profits. Set the time period of an earnout to allow the business to return to normal profitability; not one year but a three- or four-year period that allows for a natural return to a better environment.
Third, do not sell in this environment. In considering this possibility, if you can wait one or two years, the improved earnings that come with an improved economy should turn into a larger sales price.
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