The Flip Side of the Boom
Business for Sale Update
Buyers have an unusually high number of solid companies to choose from. Your best bet is to get your business in tip-top shape before taking it to market
Has there ever been a time this fabulous for selling a company?
Not even the postmillennial one-two punch of declining stock prices and rising interest rates could blunt the mergers-and-acquisitions trend that first began heating up in 1997. Solid private companies are selling for good -- and sometimes even great -- prices. The momentum is coming from the deepening pool of buyers -- cashed-out entrepreneurs, well-heeled investors, corporate refugees with severance packages or stock-option profits to burn, and, of course, all those companies on the prowl for strategic acquisitions.
A survey of the 12 companies that appeared in Inc.'s Business for Sale column from April 1999 through March 2000 reveals that 42% have been sold, in the majority of cases for their asking prices or even more. (See "Where Are They Now?" below.) That's impressive, since historically only about one-quarter to one-third of all private companies ever manage to find a buyer.
For companies with strong financials, well-prepared documentation, and a proven customer base, sales prospects often turned out to be brighter than one might have expected. The Southeastern nautical bookstore, which had lost out on a deal a year earlier (when a buyer who had signed a letter of intent pulled out because he lacked the financial wherewithal), ended up with three serious bids, which pushed the sales price to $2.5 million, from a listing of $2.25 million. The seller and his wife celebrated with a six-month cruise to Maine and Canada on their 42-foot yacht.
"One of the things that made our lives as buyers so simple was that the bookstore's seller, Milt Baker, had put together a highly detailed package of information about the company," recalls Vivien Godfrey, an Inc. subscriber who purchased the bookstore with her husband, John Mann. "95% of the time, if we had a question for him, he knew the answer and could quickly provide us with the backup we needed."
Typically, big companies sell far more easily than small ones do, and most investment bankers won't waste their time on a company with less than $3 million in sales -- and for some the minimum is $5 million. Some business brokers won't handle companies with revenues below $500,000 or even $1 million. But in the current overheated market, size seems irrelevant. The packager and distributor of safe-sex products, our tiniest contender with just $104,000 in sales, and the business-to-business Web site with $123,000 in revenues attracted between them about 350 inquiries from potential buyers. Both companies ended up closing great deals. In the case of the condom packager, it was clear, said broker Marc Dosik, who handled the sale at VR Business Brokers, that "people really responded to a successful home-based business that could be relocated anywhere."
Sometimes, of course, outside events can overtake the most carefully laid plans. That was the case with the Texas liquor retailer and wholesaler, which promised to be sold quickly with sales at $6.8 million, a superfast growth record, and a not-too-high price tag of $3.75 million. The company attracted about 100 callers; within a month, the seller had a deal for $3 million with a local resident who owned some restaurants and viewed the business as a good strategic fit.
The deal appeared finalized, but -- as often is the case -- was contingent upon financing. And while the buyer was looking for capital, all hell broke loose. As Eric White, the listing broker at Empire Business Brokers, describes it: "A huge competitor moved into town who had deep pockets and began lowering prices beyond the level that my company was even paying for its supplies. It's just unbelievable how quickly things began to unravel." The competitor managed to acquire a wholesale liquor license far more expeditiously than White and his client ever imagined possible, so the company's wholesale division collapsed as well. "To give you a sense of how bad things got," White reports, "annual sales dropped from $6.8 million to about $4 million. I'm hoping they have finally stabilized now."
But that wasn't the seller's only problem. With a $3-million price tag, the deal was too large to qualify for Small Business Administration financing, so the would-be purchaser had to pursue conventional bank financing. "The buyer was looking for about four months," notes White, "because banks just weren't willing to assess very much value to the company's $1 million in inventory. Maybe they were afraid that someone could just drive a truck up to the door and unload all that liquor if things really turned bad."