It’s probably not news to you that many businesses, after hiring an investment banker or broker to represent them in a sell-side effort, do not sell. There are a number of reasons businesses find themselves in this no-man’s land, such as unreasonable owner valuation expectations and a lack of available credit. In addition, there may only be a small number of available buyers, the size of the business could be a factor, and the investment required to grow a business could be too large. If you find yourself in this position, you have options besides waiting for more favorable economic conditions.
While each business’s position is individual in nature and no single strategy can be universally applied, a number of avenues can be explored that may effectively achieve the desired result. Most of the alternatives for transitioning out of a business are a function of how flexible you can be about valuation, how long you are willing to stay with the business, and when you receive the proceeds.
The first step in evaluating any of these options is to understand the minimum amount you would accept for the sale of the business and when you would want to be paid. A good metric, in addition to multiples of revenue and cash flow, is to schedule out how many years you would have to work to achieve the value for your business.
This metric is calculated by projecting out your revenues and expenses, including any natural growth, but not including any new investment. For example, if you believe that your business is worth $10 million and it is generating annual EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) of $2.5 million, you would have to work four years to receive the $10 million without any growth. Is it worth it to receive the $10 million today? Conversely, if you were offered $5 million for the same business, you might think that, because you could work two years and make up the purchase price, it would not be worth it to sell under those terms.
Strategy #1: Operate the business for cash flow only
One strategy might be to consider just operating the business for its cash flow until you’ve earned an amount equal what you believe the business is worth today. This plan assumes that you wouldn’t make any further investment, although it doesn’t preclude you from doing so. Without investment, sales would probably decline, so the number of years to be worked would need to be extended beyond your original calculation. In this way, you are receiving full value for the business. Then, when you have collected your “purchase price”, you can either: sell your business at a much reduced price; pursue some of the strategies discussed below; turn over your revenue to a competitor; or just close your doors.
This strategy yields full value for your business, but with extended timing to realize that value. Effectively, you have collected what you might have been paid for the business today from your own cash flow. If you would like to step back from day-to-day involvement, you might want to hire a general manager to run the business. This approach yields less value because there is no up-front payment and you are paying a professional manager a salary, but you continue to receive the profits as dividends.
Strategy #2: Take back some of the financing
If the timeframe is too long to realize the value of the business, another strategy is to accept less than full value for your company through a reduced purchase price and flexible terms like “taking back” financing, or being paid over time. You might want to list with a business broker if the value of your company is less than $3 million, or hire an investment banker if it’s greater than $3 million.
In the current environment of tight credit, many small business owners take back a portion of the financing because the buyers were only able to raise money through friends-and-family equity investment since bank debt was unavailable and mezzanine debt very expensive. This strategy realizes less than full value for your business, but with moderate timing to realize that value, and you might find this an acceptable trade-off.
Strategy #3: Sell with flexible terms
Being flexible can include taking back financing, but it also means being adaptable about the terms surrounding a transaction. In addition to companies looking for acquisition candidates, there are many individuals who would like to buy a business, but do not have the means or creditworthiness to do so. You might be able to sell to a family member or a third party with flexible terms. This usually means that you would be paid over time.
Gail Lieberman is the founder and managing partner of NYC-based Rudder Capital, which provides corporate finance advisory services to small and mid-size companies in the service and technology sectors. She can be contacted through ruddercapital.com.