Markets change and so do requisites for what matters most to strategic and individual buyers. If you are thinking about selling your business, it is important to know what matters most to a prospective buyer in today’s market.
Here is a summary of what we are seeing in the market as you think about selling your business:
As a business owner, getting the best price for your business is a top priority. You have worked hard and want to get the highest return for your efforts. In the past, it was common to pull comps of similar businesses from the last two years to determine an asking price to market a business. Today’s higher interest rates must be considered when determining the asking price, to ensure the business can be financed by a lender. Today’s interest rates mean a higher cost of capital so businesses on the market today are priced for today’s value and account for the higher cost of capital a buyer will incur as an expense.
As a business owner, it is important to understand the impact higher interest rates are having on business prices and manage one’s expectations; buyers cannot afford to pay premiums as they have in previous years. These rates are expected to hold steady for several years so, if you want or need to sell your business now, higher rates are not a reason to wait it out.
Given the impact of higher interest rates on business prices, we are taking some businesses to market without an offer price, letting the market value the business. We have had great success in various industries with this strategy and in many cases were able to get higher offers than expected.
With the failure of multiple national banks, securing financing for the deal remains a top priority for the buyer and one they may be anxious about. Buyers who already have relationships with lenders are at an advantage and should be able to show a letter of support. However, they are not able to fully secure financing until a deal is in place and the lender has much more information about the buyer and the business. In many cases, banks are asking for a small portion of seller financing, around 10% of the deal value. This mitigates risk for both the buyer and lender and shows that the seller has “skin the game” for a smooth transition post-sale. While many sellers do not favor seller financing, this can close a valuation gap, and gets the seller more money through charging interest on the loan. Since seller financing is taxed at ordinary income rates versus capital gains, having an element of seller financing can be a tax advantage.
When selling your business, expect there will be more in-depth due diligence from the buyer. Buyers are more selective and more risk averse in today’s market, so buyers are being more thorough in their analysis of businesses and are completing more in-depth due diligence on the business and real estate, including environmental studies. If you are thinking of selling, be prepared for in-depth reviews of your operations, financials, physical assets and real estate. It is important for us, as your business broker, to understand all these factors and review them with you, to make sure we can mitigate issues and present the business in the most favorable light to get you the best possible sale outcome.
Read how to prepare for the due diligence process.
Terms of the Deal
Given buyers are more risk averse, the terms of the deal are increasing to mitigate risks. Terms may include holdbacks for reps and warranties as well as potential liabilities, stricter indemnification provisions, and as referenced above, seller financing terms. It is important to work with an experienced and skilled business broker who can guide you through different ways to structure a deal, since structure can be just as important as price.
The terms of the deal and the type of offer – a stock sale vs. an asset sale – should be analyzed and weighed. We will work in conjunction with your legal and accounting team to analyze the legal and tax ramifications of different structures in a transaction.
Your business broker will also evaluate the buyers themselves, the quality and terms of the offer and evaluate the risk tolerance of potential buyers. It is important to vet the buyer and make sure they are the right fit for the business and can close on the sale in a timely manner.
Some Good News for Sellers
While reading this article may be a bit discouraging, there is great opportunity to sell your business. The number of buyers is plentiful, and we have strong relationships with individual, strategic and private equity buyers.
Currently, private equity firms are increasingly more interested in growth by acquiring smaller businesses vs. buying a platform business. This presents an opportunity for owners of smaller businesses who potentially could have more buyers interested in their business and multiple offers.
Secure a Professional Business Broker
As a business owner, you wear many hats. It can be overwhelming to think about positioning your business to sell. If you are thinking about selling in a few years, there are steps you can take to increase the value of your business. Learn more here.
If selling is top of mind, we recommend that you do not take on the role of marketing your business yourself. Secure a professional business broker who is knowledgeable and has experience in your industry and market area.
At BayState Business Brokers, we have facilitated the sale of hundreds of businesses. We welcome the opportunity to discuss your goals and help you from start to finish.