Selling Out

Inc.'s finance editor examines what has happened to those businesses that are offered for sale at the end of each issue.

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Every month, our back page features a company for sale. Here's how each business has fared

When it comes to buying and selling companies, there's a huge difference between the public and private marketplaces.

Just take a look at the U.S. economy during the past year and a half. The stock market charged into a heady, uncharted 8,000-plus terrain. Mergers-and-acquisitions activities raced along at a record annual level of $495 billion. Venture-capital investments proceeded at a breathtaking pace of $10 billion to $12 billion; initial public offerings raised $65 billion, another record.

The conclusion is inevitable: during a period like this one, in which investors were flush, bankers were willing, and boom was spelled M&A, it surely must have been the best of all worlds for those private-business owners who were ready to cash out of their companies.

Here's the shocker: all those record-setting economic trends, all those potential buyers with cash to burn, all those consolidating companies with national and international growth on their minds--they had little if any impact on the prospects of small companies with for-sale signs hanging on their doors.

Recent conversations with the owners and business brokers of the 14 companies featured in Inc.'s Business for Sale column during the gold-rush period from April 1996 through May 1997 revealed that only 3 had sold, although a couple more seemed, knock on wood, close to deals at press time. None of those sales was tied to an industry consolidation or a corporate expansion, although big companies did come window-shopping in a few instances. None of the 14 businesses had explored the prospect of going public or attracting venture-capital investors as an alternative to selling out.

Meanwhile, a few of the businesses were pulled off the market when their owners concluded that they'd be better off continuing to run their companies rather than selling at too-low prices.

The apparently dysfunctional marketplace doesn't surprise Jim Goonan, director of corporate finance and due diligence at accounting and consulting firm Grant Thornton, based in New York City. "In times like these, investors have very high expectations about what they should be able to earn on their money, which translates into a desire to negotiate for lower prices if they're thinking about purchasing a company," he says.

Meanwhile, he explains, "sellers who read about the high prices that some companies earn by going public or selling out to consolidating corporations tend to overestimate the value of their own companies because they also expect higher returns in this economic climate." Goonan concludes, "That means that economic conditions like these push buyers and sellers in very different directions. That actually makes it harder to do deals, even though there's more money available, at least in theory, to finance them."

What do the experiences of our 14 companies say about the larger marketplace? Our perspective, of course, is slightly askew: their annual revenues ranged from $141,000 to $4.8 million, clearly on the small side of the for-sale market. Still, it may be that if and when many small companies do sell, the reason is not the state of the economy but the companies' success in managing to track down a buyer who's a lot like the seller, with the same goals and interests but just a little more money to invest and a few more years to go until retirement.

"Very little has changed for small companies, regardless of all those economic records you read about in the newspapers," stresses Bill Wetzel, director emeritus of the University of New Hampshire's Center for Venture Research. "The reality is, those companies cannot--and never could--attract venture capital or angel investors, because they're much too small and they don't have the kind of extraordinary growth potential those investors are seeking. They could never carry out an IPO. So their sales prospects just haven't changed."

He adds, "Small companies are selling into a totally different marketplace from the record-setting one we read about in newspapers. The small-company marketplace consists of people who aren't necessarily looking for multimillion-dollar profits or massive capital gains. They want the lifestyle of a small-business owner and a nice salary, maybe with the potential for a comfortable, additional profit."

The only real expansion within that segment of the marketplace comes from downsized executives from large corporations, who might be shopping for a small business with their severance packages. But they're scarcely the kind of buyers who might go hog-wild with an offer: their own purchases are limited by the extent of their savings and their ability to get bank financing, always a tricky proposition for small-business owners.

There were clearly some companies--mostly big ones--that benefited from the United States' boom environment. "The two major trends driving many of those deals were industry consolidation and deregulation," explains Scott Adelson, managing director of investment-banking firm Houlihan Lokey Howard & Zukin, in Los Angeles.

According to Adelson's division, Mergerstat, which tracks mergers and acquisitions, the hot industries that benefited from those two trends during the first quarter of 1997 included banking and finance; brokerage, investment, and management consulting; and utilities. The average size of the deals? A whopping $216 million, compared with $131 million a year earlier. With that kind of deal profile, it's no surprise that our 14 companies--successful as many of them were--failed to appear on many buyers' radar screens.

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