Posted 02-16-2015 4:03 pm by
The landscape of business sales is a fluid one where changes can occur quickly. This article is a commentary on the current market conditions for buying or selling a business at the start of 2015.
Given the low interest rates offered by savings accounts, certificates of deposits (CDs), and U.S. treasuries, there are a lot of people looking to purchase a business in order to achieve higher returns. Having that said, business buyers are also cognizant of the risks that come with owning one’s own business. Having just gone through the financial downturn in 2008, many business buyers are acutely aware of what could happen to a business if the industry, product line, or competitive advantage were not strong enough to withstand a major economic recession. Therefore, despite having record numbers of business buyers seeking higher returns than what is offered elsewhere, the business buyers are also more skeptical than ever.
Banks are also more risk-adverse than they once were. With tighter lending guidelines, banks are requiring more money down. Before the 2008 recession, many banks were willing to finance the purchase of businesses with as little as 10% down. In today’s environment, banks often require 25% or more of the purchase price as down payment. In addition, the bank may require the seller to finance a portion of the purchase price as well. The portion financed by the seller could be 10% or more depending on the size of the transaction and structure of the deal. In addition, banks often require the equity of the buyer’s primary residence be used as collateral for the business purchase loan. With home equity dwindling due to the recession, bank financing for business purchases can be more challenging.
One trend seen by the brokers at Advantage Commercial Brokers is the surge of all cash buyers. Our firm works with numerous domestic and international buyers, many of whom are making all cash offers without bank financing or seller financing. The wave of all cash offers is encouraged in part by the low interest rate environment, although the decision making process of these buyers are taking longer than before. Before the financial tsunami of 2008, it took 9 months on average to sell a business. In today’s environment, the national average is closer to 12 months.
Many business sellers usually do not want to wait 9 to 12 months to sell their business. With the right strategies, the process could be sped up - sometimes as quickly as a few months. The first strategy business sellers should employ is to keep all the records as meticulously as possible. Not having meticulous books raises many questions from the buyers, drags out the due diligence process, and even causes buyers to back out once they have seen the books.
The second strategy business sellers should employ to speed up the sales process is to get a professional marketing package prepared on their business for sale. The marketing package prepared by Advantage Commercial Brokers can sometimes be several hundred pages long, and contains all the crucial info buyers need to make a purchase decision. Presenting the business in the right way can also speed up the underwriting process if bank financing is involved.
The third strategy business sellers should employ is to expose the business confidentially to as many people as possible. At any given point in time, there is a pool of buyers looking to purchase a business, and the key is to expose one’s business for sale to as many of these people as possible. This might involve e-mail campaigns, direct mail campaigns, Internet listings, cold calling, and/or business buyer databases that experienced business brokers have accumulated over the years. Some of the best buyers are people who initially were interested in another industry, but became introduced to your industry after the business broker sat down with the buyers, listened to their goals, and showed them how purchasing a business in your industry would suit their goals better than buying a business in the original industry they were interested in.
Finally, it is important to have a business broker who keeps the deadlines tight. A broker should work closely with the buyer and seller, get all of the questions answered quickly, and help the buyer and seller work through any impasses. With these strategies in place, one can sell a business successfully in today’s environment.
Aaron Muller is a business broker in Washington State who has sold over 120 companies and facilitated over 40 SBA loans for his clients. Contact Aaron at (425) 766-3940 to inquire about selling your business.