A Tough Sell
A TOUGH SELL
It’s not easy unloading or, for that matter, acquiring a business these days. But it’s not impossible. Plus, what is your company worth as the economy finally begins to limp out of the downturn.
By Ester Williams
When it comes to the market for small companies, what’s true in the best of times remains true in one of the worst: Businesses with strong profits and cash flow attract buyers. So do those boasting cutting-edge technologies. Large corporations looking to supplement their research and development efforts kick the tires of innovative start-ups. Global players seek local partners to gain a foothold in the U.S. market.
And for the rest of us, it’s really, really hard to sell a company. That’s certainly the case as 2010 draws to a close. The market for small businesses remains tough for most sellers. And even the most eager buyers are having a hard time raising cash.
Business Valuation Resources, a leading provider of information about private company transactions, recorded just 1,006 business sales in 2009—a 40 percent drop from the 1,678 deals in 2008 and a 35 percent drop from the 1,538 transactions recorded in 2007. Sales of private companies, of course, are notoriously tough to track. BVR, which publishes Pratt’s Stats, gets its data from a vast network of business brokers and investment bankers. Where does your business stand? The graphic on pages 112 and 1 13—which is based on 3,666 transactions recorded by BVR from January2007 to March 2010—can help you get a sense of how much companies have been selling for in your industry. And on Inc.com, you will find even more tools, including detailed sales information on 191 industries and a calculator to help you estimate your company’s value.
The drop in the number of sales isn’t the only unsettling thing the data uncover. Perhaps more troubling for would-be sellers is the fact that the businesses that did sell went at lower valuations. In 2009, companies were valued at .48 times net sales, compared with .52 times net sales in 2008, according to the sales recorded by BVR.
E. Jeffrey Lyons, an operating director of the Chicago-based investment bank City Capital, blames the drop on a tight capital market, which has made it hard for buyers to raise cash for acquisitions. “The biggest thing holding down valuations for small companies is the lack of available bank debt:’ says Lyons. “Entrepreneurs aren’t the only ones who cannot borrow. Buyers can’t support high valuations by creating an optimal mix of debt and equity.” A likely result is that business owners will take theft companies off the market and cross their fingers that conditions improve. “Last year, it was like we hit a gigantic pothole:’ says Walt Lipski, founder of Capital Advice, an investment bank in Scottsdale, Arizona. “It’s caused a lot of entrepreneurial owners to rethink their expectations’
Drew Sanocki, co-founder of Design Public, a San Francisco—based online retailer of furniture and household goods, is in the midst of just such a process. He and Sina Djafari founded the business seven years ago, and at first, it was a blast. But as the economy went south in late 2008, Design Public saw its revenue plunge 30 percent. Sanocki and Djafari made some tough decisions. They dismissed two employees, bringing the work force down to six. They sold off inventory at deep discounts. And they shut down the office and executed a long-standing plan to go virtual.
The cost cutting did the trick; despite slow sales, Design Public has remained profitable. Still, the pair would like to sell the business and move on to other pursuits. Sanocki figured it wouldn’t be that difficult to find a buyer for a profitable c-commerce business. But the handful of offers they have received—all of them less than four times earnings—struck Sanocki and Djafari as far too low. So now, they are stuck Should they accept a lowball offer? Or sit tight and hope that things turn around? “It’s the worst time to sell:’ Sanocki says.
THE DEALS THAT DO GET DONE
The entrepreneurs who might have cause for optimism are those who, despite the recession, have seen sales and profit growth. “People will pay a premium for a good company with positive cash flow:’ says Anthony Alfonso, president of BDO Valuation Advisors, a consulting firm in Los Angeles. In many cases, Alfonso adds, those buyers are large companies looking to make strategic acquisitions. Intel and Google, for example, have begun putting their stockpiles of cash to work, often in a bid to augment R&D efforts or to enter a new market That’s what happened in August, when Hewlett- Packard and Dell got into a multibillion-dollar bidding war over 3Par, a data-storage company based in Fremont, California. (HP won, paying a reported $2.35 billion.)
Another potential bright spot: Overseas buyers, especially from China and India, are looking for a relatively inexpensive way to enter the U.S. market, says John Bender, founder and managing director of Bender Consulting, a mergers and acquisitions veteran that led the 2001 combination of HP and Compaq. “International companies,” Bender says, “are looking to acquire companies with strong brands and patent portfolios or contract manufacturers that are located near their existing customers’
Private equity groups are also tiptoeing back into the market. That’s because low valuations and sale prices present all sorts of opportunities. For instance, Agora Capital, a private equity firm in New York City, recently acquired Antique & Vintage Woods of America, a supplier of reclaimed brick and wood materials that was founded in 1995 and is based in Pine Plains, New York. The sellers, Dale Mitchell and Marilyn Miklau, who both turned 71 this year, had their business on the market for about a year before finally deciding to sell. The acquisition, says Agora managing director Jamie Hammel, will probably be the first of many for Agora in the reclaimed-building-materials industry, which consists largely of mom-and-pop shops. “We are actively looking for bolt-on acquisitions,” Hammel says.
Meantime, many would-be sellers are behaving as though the clock is ticking. Capital gains taxes are expected to increase to 20 percent from 15 percent in 2011, which is leading many entrepreneurs to consider selling now to avoid a bigger tax bite next year. “We are seeing an increase in family-business owners trying to sell their business before year end, because they’re worried about what will happen with the tax code:’ says Bob Auer, managing director of Prairie Capital Advisors, an investment bank in Oakbrook Terrace, Illinois.
A BUYER’S MARKET PERSISTS
That’s good news for buyers, of course. But it’s worrisome for entrepreneurs looking to cash out down the road—because those selling today might be willing to agree to a lower asking price simply to get the deal done. Consider Doug Bolton, who sold his Lake Tahoe, California—based floor-covering business in August for $3 18,000—far less than he had expected. He also had to finance part of the deal himself. But, at 54, he was looking for someone else to put the energy into expanding the business further. “I guess you always second-guess yourself about how much you sell for:’ he says. “But I have to admit that tax issues did factor in to the decision.”
Economists estimate that as many as 70 percent of privately held businesses will be put up for sale within the next 10 years, as more baby boomers like Bolton retire. That mounting supply could putdown- ward pressure on valuations for years to come—a sobering message to entrepreneurs nervously waiting for the market to bounce back. “Five years from now, multiples will go down, because the supply of businesses will be up:’ says Lipski, of Capital Advice. “When you add in the uncertainty over the tax and regulatory environment, it might not be a bad idea for more owners to sell now—rather than deal with those kinds of headaches down the road.”