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Is Your Business Fit to be Sold?

Consider these 4 characteristics before putting your business on the market.

It's been a difficult year for most entrepreneurs hoping to sell their business. According to BizBuySell.com's data tracking the health of the small business market, the first quarter showed a 36 percent decrease in the amount of business-for-sale transactions as compared to the same time in 2008. Unfortunately the newly- released second quarter data indicates the situation has gotten worse.

In the second quarter, the number of closed transactions decreased more than 50 percent year-over-year. Additionally, all of the critical metrics related to business-for-sale transactions have gone down. Revenue multiples on closed transactions dropped 2.5 percent, cash flow multiples dropped 8 percent and the median sale price for closed transactions dropped 20 percent to $160,000.

With closed deals at a record low, it's safe to say many business owners looking to sell now are finding it a struggle to stay positive. The news might seem anything but encouraging; yet it doesn't mean there's no hope for selling a business successfully in this market. The truth is that some deals are closing, but in almost all of these cases there are some key attributes involved. Any business owner with a company on the market or who is planning to do so should be aware of the following four considerations.

  1. Clear potential for profitability: Anyone looking to purchase a business wants to feel confident in the ability of that business to make money in the future. If business sellers don't make their companies' potential for profitability crystal clear, they'll have a hard time keeping potential buyers interested long enough to get a deal off the ground. Any seller with evidence of steady, reliable cash flow and revenues automatically has a leg up, which could mean the difference between selling and not selling in today's formidable market. If buyers can see a business has managed to maintain its profitability during these tough times, they'll know there's stronger potential for when the market improves and there's less risk in moving forward with a transaction.
  2. Strategic value: Not only is it important for business sellers to show potential buyers they've maintained profitability during these difficult economic times, but also to provide evidence the business has the potential to grow and thrive to a greater extent down the line. Sellers who can offer buyers a focused plan for growth--which might detail strategies such as acquiring competitors or expanding to a complementary product or service--are having an easier time closing deals.
  3. Seller financing: There's been a lot of emphasis placed on a seller's willingness to finance at least part of any business-for-sale deal in recent months, and for good reason. Transactions that require buyers to come up with the entire purchase price of a business simply aren't able to close in the majority of today's cases. Buyers are faced with major drops in savings and retirement accounts as a result of stock market declines and they've been hit with increasingly limited access to SBA-backed commercial loans. As a result, the sellers willing to finance part of the sale price and allow buyers to pay them back with interest later are having the greatest level of success.
  4. Physical assets for debt financing: It's no secret that banks are more cautious about lending now than during any time in recent memory. As a result, businesses with greater amounts of tangible assets--such as capital equipment or owned real estate--are having much more success securing purchase loans.

While we expect the small business market to improve in the coming months, for now business owners considering going to market should think carefully about whether their businesses are fit to sell during these tough times. If they're not, owners would be wise to take steps to make their companies more marketable before going ahead with a plan to sell. However, if the business can appeal to buyers with these attributes, sellers can have great success overcoming current economic roadblocks.
 

Mike Handelsman is Group General Manager of BizBuySell.com--located in San Francisco--and BizQuest.com, two business-for-sale marketplaces. Both sites feature business valuation tools that draw from the largest databases of sales comparables for recently sold small businesses, and two of the industry's leading franchise directories.

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