From Fannie and Freddie to rising unemployment, high energy costs and a sluggish growth rate, the economic turmoil continues. As a business owner, you might think this is an impossible time to sell your company and get a strong value. Thankfully, that’s just not the case.
In fact, we’ve closed more deals at Cornerstone this year than any year prior, and Finance Week recently described the Midwest as a “hotbed of mergers and acquisitions activity.”
You can still realize a successful transaction at a premium price, if you understand what you need to structure a deal:
First thing to consider in selling business, is buyer credibility. You need to obtain the best buyer possible. This is a company, an individual or a Private Equity Group with a good reputation, substantial assets to pledge as collateral or a committed fund, and demonstrated success in an industry related to yours.
With a proven, credible buyer at the table, lenders can more readily support the transaction.
Second, expect to provide some seller financing. To obtain a premium for your business, you will have to share the risks with the buyer and the lending institution.
In most cases when we’re selling a successful business, the value is greater than the assets owned.
In today’s tight lending climate, you can still get a strong value for your business, but the seller has to finance more of the purchase price than before.
In the past, we saw seller financing between five to 15 percent. Now, that number is closer to 15 to 25 percent.
Those payments are typically structured with something near a 15-year amortization rate at an interest rate one percentage point higher than the lenders, and a balloon payment between three to five years.
Once the buyer has proven themselves in the business and established a record of consistent debt payments, the bank will generally refinance the seller’s note. As a result, the seller receives full payment within three to five years and the bank gets to lend more money to a demonstrated lower-risk borrower.
We’re still seeing a lot of buyers, despite the turbulent economy. However, this is not ideal for everyone, as an alternative to these elevated seller financing rates, a seller may opt to hold the business for two years or more and wait until the banks return to a more positive lending environment.
Note that in doing so, a seller runs the risk that the capital gains tax could increase and the positive mergers and acquisitions market will change.
We’re seeing more sellers decide to take 75 to 80 percent on a good value now—with the remainder due in a few years—rather than postpone the sale and risk the unknown of possibly paying more in capital gains.
Scott Bushkie is President of Cornerstone Business Services, a low-to-middle-market M&A firm. Reach him at 888-608-9138 or firstname.lastname@example.org