Inc's Business for Sale Roundup: Nothing's Moving
Times are tough for business owners looking to sell, and it's not clear when things will rebound. One thing is clear: the sellers and buyers who thrive will be those who are able to move quickly, find capital, and continually adapt to change.
Buyers are looking for companies. Sellers are ready to exit. So how come nothing's moving?
Times are tough for business owners who are ready to sell their companies. Compared with the profitable exits of the mid-to-late 1990s, valuations are lower, credit is tighter, and buyers are more demanding.
Although the buying and selling of small companies is not typically detected by the radar of financial-tracking services, the numbers those services publish are still useful for small-company owners. That's because low-priced mergers and acquisitions are affected by the same market forces and follow the same basic trends as their big-ticket counterparts. And that's been bad news for Inc's community of entrepreneurs.
Consider some numbers. Last year saw a 16.4% drop in the number of transactions completed -- the greatest year-to-year decline in mergers-and-acquisitions deals since 1987, the year of the "Black Monday" stock-market crash. When measured by deal value, as tracked by Mergerstat, the toll looks even worse: total deal value fell from $1.3 trillion in 2000 to just over $700 billion in 2001, a drop of nearly 50%.
Inc's Business for Sale column featured 20 businesses from April 2000 -- the month the dot-com bubble burst, fueling the United States' economic nosedive -- to November 2001. (See " Make Me an Offer ... Please!" below.) Only 10% -- meaning a grand total of 2 -- of those featured businesses were sold: the southeastern seafood distributor and the midwestern outdoor-advertising company. But with nary an offer in sight, owners of 9 of the candidates took their businesses off the market, usually with some plan to better position themselves for a sale at a later point. One owner simply gave up and closed up shop.
For the eight Business for Sale candidates still trying to attract buyers, and for the many entrepreneurs across the nation with exit strategies on their minds, there are lessons to learn from all this. First and foremost, the old rules (that is, those relatively new rules that we came to accept during the 1990s as the way business life was meant to be) no longer apply. What will replace them? Who knows? It's not clear how long it will take the M&A marketplace, at all levels of deal size, to rebound -- and how it will rebound -- even after the overall economy gets a solid footing on the recovery path.
Until then, today's creative chaos will be the norm. So long as buyers expect bargains and sellers expect the high payoffs that until recently were the norm, the negotiation process will remain thorny. The only deals that will get done are those in which the sellers aren't willing to wait for better days. Buyers with cash on hand will dictate the terms of the total package, which will undoubtedly include a lower asking price but maybe also real estate, earnout agreements, seller-employment contracts, and noncompete clauses. Sellers who resist will need to either accept stock deals, which are especially problematic in volatile economies like this one, or help finance the acquisition themselves. All in all, it's a far cry from the conditions that flourished during the mid-to-late 1990s, when entrepreneurs whose companies had strong growth prospects often had multiple suitors courting them and a host of attractive deals to choose among.
The sellers and buyers who thrive in this marketplace are flexible in their strategies and actions, capable of moving quickly, able to find capital (somehow), and above all else, continually adapting to change.
Deer in the Headlights
If there were ever a dream business, it would be Gary Koeppel's coastal California art gallery. The company, which includes craft shops, a restaurant, and a home site, has just about everything going for it: breathtaking views from its location atop the cliffs of Big Sur, a record of profits, and cash flow so robust that it supported $150,000 worth of annual owner's compensation. Plenty of would-be buyers contacted Koeppel after the gallery appeared in Inc's June 2001 column, but nobody made an offer. And the owner, an academic-turned-entrepreneur, knew that he had no choice but to listen to what the market was telling him.
"I never would have known this without the experience of putting the company up for sale and then getting all that feedback," he reports. "People were worried that the cash flow -- although it was very good -- wasn't high enough to justify the very high price of my real estate." It is remarkable that that was the case even in a sure-thing real estate market. Buyers were cautious.
Some people proposed purchasing the gallery, craft shops, and restaurant and leasing the building and land from the owner -- "I could have sold it 20 or 25 times that way," Koeppel says -- but he wasn't interested in becoming a landlord and wanted to cash out all at once. So instead he decided to focus on boosting his revenues and cash flow to levels so high that the disconnect between the business and the real estate would disappear. "I'm doing the same things that a buyer might have done to accelerate growth," Koeppel explains, "including working on a high-quality mail-order catalog and creating a Web site that will attract a big volume of sales."
Listen to the market. If it's telling you that your cash flow is too low or your sales price is too high, you have to either respond or kiss your sale prospects good-bye. It's noteworthy that two of the eight Business for Sale candidates that are still on the block have reduced their asking prices. Only one company, the California dining-yacht service, raised its price, which took chutzpah. The price hike, however, may be justifiable, since the recent addition of a valuable asset (a new boat) may help a buyer get financing.
