You might be surprised to learn that right now there are many buyers looking to acquire businesses. Why? Billions of dollars have moved away from Wall Street and on to Main Street. Investors are looking for good deals on businesses that have previously enjoyed solid historical earnings. Many buyer groups believe that investments in smaller companies, over which greater control can be exercised, are much safer than publicly traded companies, over which no control can be exercised.
What does this mean to you? Basically you have the following choices:
1. You might sell your business now for whatever it is worth (probably much less than it was worth several months ago) and eliminate the risk of further declines in value (this also considers the present value of your money),
2. You can just continue on as you have been - and hope for the best. You might sell it for more or less later.
3. You might just operate the business until you later close the doors, or
4. You can take steps to improve the efficiencies of your business operations and wait for a better market in the future.
Which of the four choices should you select? The following observations should provide useful insights.
Selling your business now
Selling your business now will likely produce a much smaller price than what you may have received a year ago. Do you wait until the price goes back up? That's a tricky question, especially when you consider that a dollar received in the future is worth less than a dollar received today (time value of money concept). Here are some considerations:
- The increase in value of your company depends upon things such as improvements in the economy, improvements in your operating profit, the interest rates charged by lenders (the higher the rate, the lower your company's value), better expectations within your industry and better expectations in the industries in which your customers operate. If the listed factors take several years to be achieved, it may be several years before your company value climbs back up to where it had once been.
- Consider reading Industry Updates for your particular industry. Good sources for industry updates might be your trade associations, Federal Reserve reports, or from companies such as First Research Industry Profiles, Inc.
- If the outlook for your industry is favorable, you might consider the feasibility of holding and operating the company until the improvements can be seen. Be cautious of holding on too long, though. You can just continue on as you have been---and hope for the best
Continue on hanging on until things improve
Here are some considerations for those folks:
- Every year you hold the company, the less value you will ultimately receive (in today's dollars) upon the sale. Example: Your Company was worth $1 million dollars two years ago. But, current financial circumstances have lowered the value of your company. Assume that you could have sold the company for $700K today. Instead, you decide to hold the company, and in 4 more years you are able to sell it for $1 million. Did you really recoup the $300,000 by waiting? Consequence: In economic theory, a dollar received sometime in the future is worth less than the same dollar in hand today. Investors refer to this scenario as the time-value of money. The financial and investment communities discount the value of money received in the future, based upon risks associated with the funds to be received. For businesses, these risks (discount rates) can range from 12% to 30% or more. For this example, let's assume annual risks associated with holding your company (these include inflation, possible higher tax rates, normal return on your investment, systemic risks, etc. of 12% annually---a very low annual risk assessment). The relative value of receiving $1 million 4 years from now equals only $ 599,695 in today's dollars. ($1,000,000 x.88 x.88 x.88 x.88 = $599,695.) By holding your company 4 years, you didn't really make an additional $300K; in fact, it cost you $100,305 in today's dollars.
- In the event your company value does not increase, the real cost to you can be substantially more, even if you sell the company in 4 years for the $700K you are offered today. Example: $700,000 x.88 x.88 x.88 x.88 = $419,787. In terms of monetary buying power, in four years the same $700,000 may be worth $280,213 less than it is worth today. The example of 12% annual discount could be substantially higher, depending on interest rates and inflation factors over the next few years.
- Consider that today's bird in hand may be worth much more than several birds in the future.
You might just operate the business until you later close the doors:
If you are in good health and don't mind putting in the extra years, you can always just operate the business for several more years and depend upon the annual cash flows to provide financial subsistence. Points to consider:
- Your health is important. This plan will work assuming you remain in good health and do not become incapacitated in any way.
- Your life goals should be considered. Do you want to spend more time with the family, travel, play more golf, etc.?
- The longer you operate the business, the greater your exposure to operating risks such as lawsuits, further declines in the economy, obsolescence of your product/services etc.
- What are the costs of closing the business in several years?
- Do you have a work force that must seek employment when you close the doors?
- Will closing the doors of the business have an emotional impact upon you and your family?
You can take steps to improve the efficiencies of your business operations and wait for a better market in the future
In the event that you decide to hold on to the business, remember that you will likely have to make value improvements to your business in order to economically just break even with what you might sell the business for today.
- If you hold the business for 4 years, you will need to sell it for MORE than $1,000,000 just to equal a $700,000 sales price in today's dollars. Remember the earlier example where a $1,000,000 sale in 4 years equaled only $599,655 in today's dollars?
- Example: To achieve $700,000 in equivalent of today's dollars, you'd need to sell the business at the end of 4 years for $1,167,338. This assumes the annual risk of 12% for each of the 4 years. ($1,167,338 x.88 x.88 x.88 x.88 = $700.047)
- To improve your business value, you will likely need to hire value enhancement consultants to assist you in the implementation of improvements. It will also cost you money to implement suggested improvements.
The considerations you must make are serious. Selling your business in today's economic environment may still be your best bet. Nobody can predict the future, though.
Now, more than ever you need the very best professional guidance you can get. This is when working with a professional business intermediary (broker) can make the difference between just getting rid of the business and selling it for the best price and terms.
Grover_L._Rutter
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