Selling a business is an important decision, and how to prepare for a sale has become more challenging due to the pandemic and government disruptions. Stress and anxiety can cause business owners to become paralyzed with indecision or to act rashly. While these times are certainly difficult, taking a thoughtful approach to a sale will help you make good decisions and sell when the time is right.
If your business has weathered this environment and remained relatively steady or rebounded, there’s good news. Pandemic-resistant businesses are in demand. Strategic buyers are active, and it’s a seller’s market. There are more buyers than businesses currently on the market, and new government programs have provided many incentives for buyers to more easily get SBA loans, including low interest rates, 6 months of “free” payments and no SBA guaranty fees. According to the IBBA and Market Source Market Pulse Third Quarter 2020 survey, many high-level executives have been displaced and are looking for new opportunities and more autonomy. Also, private equity firms are now considering smaller businesses with $1 million EBITDA, and sometimes less. The Market Pulse survey data reports that median sale prices (as a percentage of the asking price or internal benchmark) have risen year-over-year in four out of five sectors.
While it’s impossible to predict the future, market dynamics will change, and capital gains taxes may rise under the new administration. Many in the industry are also predicting a “baby boomer tsunami.” Business owners in that age bracket are projected to list their businesses for sale within the next few years without enough Gen-X buyers available to purchase them, creating a buyer’s market. With all this information, what’s your best course of action?
If you must sell immediately, we can identify qualified buyers for a quick sale. If you can afford to wait, it’s best to plan and engage BayState Business Brokers as early as possible, especially now. The right broker can help determine the optimal time to sell and assist in making strategic decisions that can affect the value of your company when you do decide sell.
If You are Considering A Sale in the Next Two Years, Look at These Things NOW
You should get a business valuation sooner rather than later so you know the likely sale price well in advance of needing to sell. The worst position is needing to sell but not being able to because the company isn’t worth what you thought it was. We can provide a business valuation and work with you to identify risk factors and areas you can improve to increase the business value. Conducting the business valuation well in advance of the sale will give you time to mitigate risks.
Here are some of the risk factors business owners may have not considered:
- What type of corporation do you own? Older businesses may have been set up as C Corporations. C Corporations are taxed at approximately double the rate of S Corporations at the time of sale. Working with your accountant to convert to an S Corp can save significant tax dollars.
- Are all records in order and in one system? Small businesses often convert their accounting systems from manual to online systems over the years. Bookkeeping records need to be complete and transparent to an auditor to command the best sales price. Planning ahead gives you time to make sure your records are complete and in one system.
- Do you own real estate? If so, a financial advisor can advise if a 1031 exchange makes sense to defer capital gains taxes.
- Do you rely on just a few customers for most of your sales? Your business is likely to be valued lower if this is the case. Diversifying your customer base before selling your company will boost its perceived value.
Staff and Management
- Are you or another member of your staff invaluable to your business? Small businesses often depend on an owner or another staff member to wear many hats. This is a red flag to potential buyers and may impact business valuation. If you or the key employee leaves, the business consequences could be serious. This risk can be mitigated by putting a succession plan in place or expanding the management team in key functional areas such sales and marketing, finance and operations.
- Are you on good terms with long-time customers? While intangible, your reputation is a valuable asset. If your company has ill will with customers or within the community, improving those relationships before a sale will positively impact your potential profit.
These are just some of the factors that a business valuation report will cover. The earlier you engage us in the process, the more time you have to boost the value of your company.
If you’re considering selling your business, contact us. There’s no commitment, and we can give you advice that can help you get the best price for your business at the right time.