If you're thinking of cashing out, there may be no better time than right now. A look at what happened to 22 companies previously featured in Inc.'s Business for Sale column.
Business for Sale Update
Thinking of cashing out? It seems that now may be the time to do it--or so the sellers featured in our monthly Business for Sale columns have discovered
Megamergers have been grabbing headlines for the past few years. And no wonder--in 1998 the value of large-scale mergers and acquisitions shot up to an all-time high of $1.2 trillion, with the average deal weighing in at $394 million. But does that mean that M&A prospects for small companies have been equally robust? Or has all the heated activity among large businesses monopolized whatever financing capital might otherwise have supported small-business sales?
The rule of thumb for small private companies is that under normal market conditions, one-quarter to one-third of those on the selling block actually get sold. That means that when most small-company owners are ready to cash out, they're unable to sell their businesses. (See "No Sure Thing" below.)
Because the marketplace for selling small businesses is so vast, fragmented, and underpublicized, it's tough to come by any statistics about earlier years to compare the current market with. But as a starting point, we contacted the 22 companies that Inc. featured in the Business for Sale column from June 1997 to March 1999. We hoped the experiences of those companies--which represented a broad spectrum of industries and had annual sales ranging from $125,000 to upwards of $13 million and profitability levels spanning all shades of the rainbow (or at least ranging from a big splash of red ink to black)--would help us understand what's been selling and why.
Our survey revealed that 9 of the 22 companies were sold--a 41% success rate. In almost all cases, the deals were closed within striking distance of the owners' target sales price. And if we add to this mix the four companies whose owners decided to take them off the market and pursue alternative growth strategies, 59% of our group of 22 reported a happy ending to their for-sale stories.
Other evidence supports that positive trend. According to VR Business Brokers, a network of 50 business-brokerage firms across the United States, the average price for small businesses sold last year increased by 9%, from $146,000 in 1997 to $160,000 in 1998. (On average, $160,000 bought a company with $455,000 in sales.) Thanks to a strong market, not only did more companies sell, they sold more quickly. With the exception of two or three months last autumn (when banks clearly did become more cautious about backing sales of small companies), there's been more than enough capital around to support an active marketplace.
Marc Dosik of VR Business Brokers' office in Columbia, Md., sums it up this way: "It's just a great time to sell. We're getting more and more calls from people who are looking to buy good small businesses. And what I see again and again is that if you've got a company that's well priced and there's any kind of dynamic supporting industry consolidation, you'll wind up with two or three strong bids and sometimes even a bidding war."
Although a fair number of our Business for Sale companies seemed ripe for consolidation plays, only one--the computer reseller--was sold to another company in its industry (a competitor, in fact). In that case, the buyer kept the deal hush-hush and decided to maintain separate operations after the sale rather than merge the two businesses outright.
That's not to say, of course, that big companies didn't come calling at some of our other businesses' doors. The child-care center attracted a decent amount of initial interest from other players in its industry. "The problem was, it was probably a bit too small to make the deal worthwhile for a bigger company that wasn't already operating in the area," concludes broker Bryan Keys Hands.
Then fate stepped in to aid the $430,000 (in 1997 sales) business. One of Hands's colleagues mentioned the center to someone from his church, piquing that person's interest. Through local connections, the prospective buyer was able to raise financing from regional economic-development organizations that support minority business owners and the day-care industry. A closing is scheduled with the selling price at $250,000, just $20,000 less than the asking price.
It's not surprising that the Internet service provider also attracted interest from would-be consolidators. Given the frenzy that's surrounded many Internet-related businesses during the past year, one might well have expected a gold-plated bidding war, even though this $150,000 company (in 1997 sales) was operating in the red. (If the initial public offering market is any indication, that's practically a selling point for Internet companies.) But this company ended up getting sold for a paltry $25,000, just 12% of its original asking price of $210,000.
While the owner did receive some higher earlier offers, they were all below his asking price, and he turned them down. "This was a case where the seller just wasn't being realistic, because he should have learned something from the fact that all the offers were coming in at roughly the same lower level," notes Dosik, who represented the seller. "He ran into a situation where his manager was going to leave, some other events turned against the company, and it was either close it down or sell it at a bargain-basement rate. That's what he ended up doing."
