We are currently in the middle of a pandemic on top of dramatic changes to our nation’s political policy makers’ power structure. Either one of these dynamic shifts will have a disruptive impact on all market fields, but we’ve tried to take both into account here in this overview of current market conditions for people looking to sell their business.
Currently, it is a seller’s market for businesses. The available inventory of businesses for sale on the open market is minimal, and there are a lot of buyers out there competing for them. The biggest concerns right now for sellers is potential tax-hikes in the future and having an accurate valuation. Valuation structure is a little trickier to calculate in today’s conditions than usual because valuation is part science and part artform. Having a little more prep work done ahead, such as the COVID era valuation with more thorough forecasting, will benefit all people who want to bring their business to market, now or in the future.
Some businesses (such as restaurants, for example) may have to take a longer pause right now, as forecasting their revenue is nearly impossible at the moment. For the businesses that can still forecast their COVID-impacted revenue in a way that banks can understand, it is sometimes taking 75 to 90 days from LOI to closing. But overall, there is little change in terms of the traditional steps of due diligence required for these businesses, when they have the COVID impacts accounted for. There is particular attention by buyers and banks being paid to workplace health and safety as well as IT systems or potential supply chain risks.
There is no shortage of funds available to make these deals happen. If a potential seller took out a PPP loan that has not been forgiven prior to closing, sellers need to set up a cash escrow account with the PPP payoff at closing, but the cash is returned to the seller once the loan is forgiven. The SBA has also temporarily renewed their COVID stimulus program to defer payment for the first 3 months of ownership for buyers, to assist in building up their cash flow. The SBA will also provide a larger guarantee to the bank, which would help the bank be more flexible in which deals it finances. Currently the SBA will guarantee 90 percent of the loan.
In preparing your business for sale, owners should look first at making sure things are well-run, if they want to maximize their value. Organizational structure with the right talent and division of authority is important to buyers. Second, sellers should be working with a team of experts as early in the process as possible to uncover issues before the buyers find them. Sitting down with your exit planner and outlining your goals and objectives is the best first step you can make as a seller. We can start planning your exit at any point, but to maximize results, starting years in advance is recommended. It usually takes two or three years to make course-corrections and stabilize operations inside the business to get everything setup for commanding the highest prices.
If the issues are already known, you can compress the necessary preparation time down to one year to get ahead of the issues. But you need a team of advisors to get the best results and make sure you are fully protected as a seller. A strong accountant, a law firm, and someone to objectively look at your transaction like a buyer (a business broker) are the bare minimum team of advisors you should look to. This team can point you to other resources if the need for them arises. Which type of buyer is the right kind for your business is a serious question that requires careful consideration and advice from your team.
The current outlook for the small business to lower middle-market transition is positive for the next 12 to 18 months, unless we see significant adverse changes in the economy (due to significant inflation or major changes in tax policy, for example). The demand that built up due to the slowing of the market in 2020 will likely accelerate the market in 2021. Right now, the sellers can leverage their value, and valuations market multiples are high, so sellers should take advantage of the current conditions if they are ready to sell.
One of the largest decisions a business owner makes is the decision on when to sell, because it has both emotional and financial impacts. In order to make the most informed decision and ensure full protection for yourself and your business, you need a great team of experts on your side. The objective view of how your company is actually running is priceless, and the input on prospective buyers (from reverse due diligence) helps to make sure that a good deal is made for all involved parties.