The International Business Broker Association (IBBA) and M&A Source, in a partnership with Pepperdine University, have released survey results that concern businesses listed for sale and sold during the 2nd quarter of 2014, and the findings give current and future sellers insight into the current state of the market, as well as what they can do to increase their chances of a successful sale.
For most small business owners, the data of greatest interest would be defined as “Main Street”, or businesses with a value of up to $2 million.
For most small business sectors, the EBITDA Multiple (the estimate valuation of a business) increases with the size of the business. Very simply, the larger you grow your business the larger it’s value will become to a buyer.
For businesses that have a valuation lower than $5 million, seller financing is still the king, Nearly one out of five businesses in the $500,000 to $1 million price range required some type of seller financing as part of the deal.
Another creative deal structure? The earn-out, where a seller and buyer bridge the valuation gap in a fast-growing business, although for smaller businesses valued at less than $5 million, this type of deal structure is uncommon.
For businesses that fell the less than $1 million category, first time buyers dominated the market, outnumbering any other type of buyer in the second quarter. The prevalence of first time buyers can create a challenge for business sellers because most new buyers don’t have a clear understanding of how to read business financial statements or how to understand recasted numbers that make adjustments for things like personal expenses.
To avoid any confusion or the appearance of “cooking the books”, streamline your financials before you list your business. Remove your personal expenses, make sure your payroll includes all key employees (including you) and have your business broker help you recast and organize your financial records and other pertinent documents. This way any first time buyer can clearly see what they are buying.
Unclear and unorganized financial records weren’t the only downfalls of the 78% of deals that ended without closing in the second quarter of 2014.
The other biggest mistakes sellers made were setting unrealistic expectations, letting business sales decline, waiting too long to list the business and letting emotional ties to the business hold them back.
If you are trying to sell your business, it can be very easy to demand a high price and an all-cash offer, but the reality of the market is your business is only worth what someone is willing to pay – and the vast majority of deals come with at least some seller financing. By having realistic goals in place from the start, you can avoid getting hung up on expectations that will never be realized.
Another big mistake involves mentally checking out the moment your business is listed, typically causing falling numbers and a corresponding decrease in your valuation. It can take 9 to 12 months to sell a business, so if you want to get the best return on your investment, the time between listing and selling is when your business needs you the most.
If you are waiting for the perfect time to sell your business, now may be the time. The rebounding economy has buyer confidence up, and the wave of baby boomer retirees has yet to flood the market with other businesses for sale. Waiting too long may mean you enter the market when there are more sellers than buyers, so get out in front of the wave now.
The last pitfall, emotional ties, can be one of the most difficult to overcome. Your business is your baby, but to a prospective buyer it is nothing more than a potential investment opportunity. By seeing your transaction from the buyer’s side, you will be less likely to be offended by low offers, renegotiations and the like.
If you are a business seller – the market looks good. Avoid the most common pitfalls and you could be well on your way to a successful sale.
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