"If you're already overloaded, don't wait for your banker to tell you," advises Stephen King, president and CEO of Virtual Growth Inc., an accounting firm in New York City. Look for ways to reduce your leverage, perhaps by selling off any assets, like real estate, that don't directly support growth activities.
On the other hand, debt in itself is far from a sin, even these days. "Whatever the state of the economy, a business owner should always take into account the cost of capital when deciding how much debt to take on--and interest rates are very attractive right now," King notes. "Borrowing funds at a low cost to go after revenue growth is still a sensible strategy, so long as you've got a strong balance sheet to support that debt." Make sure your borrowing stays within a two-to-one debt-to-equity ratio.
What if bankers get tougher about lending funds to entrepreneurs? That may well happen, especially among super-large financial institutions with only the briefest of histories in this market. But among community and regional lenders, which have the closest ties to small private companies, basic lending practices may not shift at all.
"Community bankers tend to have experience with those kinds of companies," says Terry Jorde, president and CEO of CountryBank USA, in Cando, N.D. "That means they won't suddenly change their own terms just because the larger economy turns bad." She adds, "Those bankers, as well as their business customers, should always feel the same in good times and bad, which is that cash flow is the key to everything. If you project it conservatively, you always should be able to maintain the same basic leverage strategy."
But just because your basic borrowing strategy remains constant, should you still award credit to customers in shaky times? Absolutely, so long as your fundamental credit policies are sound. "That is a very simple thing to monitor," explains King. "The key to everything is one simple number that every business owner should track: day's sales outstanding--DSO." (To calculate, divide your average receivables by total sales and multiply the sum by 360.) "If you are a service company, for example, and your DSO is only around 30, then you're doing a great job of collection, and you can probably increase your credit exposure in cases where you believe it will add to your revenues and bottom line. But if your DSO is much higher, say 45 or 50 or more, then it's probably important for you to tighten your credit standards and award it only to those companies more likely to pay you quickly." Remember: just as with leverage, credit makes sense only when it helps your company grow. --J. A. F.
Will I ever be able to sell my business?
There may be no single issue causing more anxiety for entrepreneurs these days than the fear that they may have missed the opportunity to cash out. Indeed, given the astronomical values that many growth-oriented companies were able to command in recent years--both in the IPO market as well as through private sales--that anxiety is all too understandable.
So here's some good news. Despite the tumult overseas, as well as the fluctuating stock market here at home, the mergers-and-acquisitions market for privately held companies has been holding up quite nicely. In fact, the chances for many entrepreneurs to sell out may have actually improved thanks to current problematic economic conditions.
"The shaky U.S. stock market has been good for company sales," says Catherine Bienert, a business broker whose company, Bottom Line Management Inc., is based in Atlanta. "When stocks were very, very strong, some people were scared off from buying companies, because stocks seemed like an easier and safer way to earn a return on their investments. Now people are back to realizing that a good, healthy company may be a more profitable, and even safer, way to invest their capital over the long term."
Bill Vogelgesang, an investment banker at the Cleveland office of Brown, Gibbons, Lang & Co. LP, agrees. "In the midmarket range, which is where most of our clients fit, we're still seeing a lot of interest on the part of buyers. Ironically enough, what helps is the fact that these are relatively small transactions, which are usually fairly simple for them to finance. For much bigger companies--the kind that might have sold for $200 million in a deal that depended upon financing from the high-yield-bond market--those are the deals that are running into difficulties right now."
So there's no reason for business owners to fear that their opportunities to sell their companies have dried up. But it is undeniable that sale prospects have changed, most especially in terms of deal valuations. Vogelgesang's own experience suggests what he terms "a drop of somewhere between one-half to a full point, meaning that companies that might have sold for multiples of 6 to 7.5 might now go for 5.5 to 7 times earnings." It's unclear how much further valuations will drop, although the investment banker remains hopeful that the "worst may be behind us."
There are two basic reasons for this type of decline. First, with the IPO market going through one of its all-too-predictable cyclical swoons, business owners can't count on the lucrative public-offering option, which increases the bargaining power of all those potential private buyers. But another factor taking its toll is what Chris Mercer, a valuation expert and president of Mercer Capital in Memphis, terms "an unusual situation on the financing front. Money is cheap, and there are enormous pools of it still available, yet bankers and potential buyers are becoming increasingly cautious. So we're seeing more caution in terms of how much risk anyone is willing to build into a deal in terms of its price and leverage."
One final tip: when market conditions are as unstable as these are, it pays for sellers to be as cautious as buyers. That may mean opting for a lower sales price if it is paid in cash rather than in stock or if it precludes a prolonged and possibly risky payout schedule. And above all else, carefully investigate prospective buyers. "You don't want to find yourself in a situation in which your deal stalls or falls through because the buyer's financing package wasn't sound," advises Vogelgesang. -- J. A. F.
