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Day: March 12, 2017

Current Conditions for Selling a Business

Current Conditions for Selling a Business

There are a number of cyclical factors that affect the optimum time to sell a business. Of course, is the business doing well? Are the revenue and sales trends upward? Does the future look bright? Other factors include the motivation and industry focus of buyers, as well as, their funding rates and availability.

Currently (2017), the private equity buyers are numerous, well funded with unused cash, and a hungry appetite left over from the slow years of the recent recession. This coupled with historically low interest rates and an easing of commercial borrowing make the demand side of the transaction very favorable to a seller. IF the potential seller’s business is preforming well then now is a great time to sell. Performing well means are the business’ earnings growing from increasing sales, are the continued growth opportunities likely and evident, and are the product or service margins not contracting. When these factors are inline the seller’s representative is in a position to sell the business on the present and also on the near term future rather than on a historical earning formula which includes recessionary years that would reduce the sale price.

An accomplished business brokerage consultant like The Montana Group (www.montanagroup.com) will know of the best method for selling the business. Occasionally, the most advantageous buyer is a company within the selling company’s focus. This is known as a strategic buyer as there are strategic reasons to be buying the business. While this seems a logical place to negotiate, these buyers are often not aware of the current rates for purchasing a business and thus their offers are deficient.  The other type of buyer is the financial buyer who is interested in buying a good business with a definable upside and can be purchased at a price that is consistent with the cash flow multiples currently paid for such companies. The Montana Group does not charge a retainer so it’s success-based only fee is motivating.

Owner / Representative Partnership

Owner / Representative Partnership

The process of selling a business requires the mutual confidence between the owners and their representatives. It is essential that this go both ways. The owners are probably selling their most valuable asset and a similar sale will likely never happen again for them. The representative needs to feel as though their client does not begrudge the fee but understands and embraces the mutual benefits by properly incentivizing their representative.

The theme of this relation is that everything of financial benefit to the sellers should be part of the fee calculation. This obviously begins with the business’ sale price but extends well beyond. This could include additional money from a closing working capital balance sheet improvement, from personal asset that are in the business but are distributed to the seller at closing (e.g. car), or from something unique to this particular company. Also, incurring expense savings such as the assumption of interest bearing debt by the buyer is an important enrichment. Sellers must make sure their representative feels very confident that even if a financial benefit is not specifically listed in the fee schedule that the owner’s philosophical desire is to pay for what is received.

The incremental increases beyond the agreed upon purchase price is what makes it critical when selecting a representative. A representative that is very good often more than pays their transaction fee with incremental increases over and above the sale price, often in areas that would not be known by a company owner who has no experience in where to locate them. This also amplifies why an owner, rather than attempting to sell the business directly, needs a very experienced consultant who through many many closings knows where to find the extra benefits. The same can be said of the owner’s accounting and legal advisors who’s training and daily focus is not on selling businesses. In summary, the representative/consultant needs to offer a fee agreement in such a manner as to participate from the various ways to escalate the overall financial benefits to the sellers, which is the intent of a mutually beneficial relationship.