In this time of dropping valuations many would-be sellers are like deer blinded by headlights: they're paralyzed. Since they aren't willing to lower their expectations, they've taken their companies off the market and hope for better days. But there's little evidence that we'll see a return anytime soon to the valuation levels of the mid-to-late 1990s.
Meanwhile, even in industries in which valuations have remained relatively stable, prices have been dropping. "It's a very tough environment out there," says Mike Sharp, a business broker at IndustryPro, based in Midvale, Utah. "If you've got a company whose cash flow or profits were lower last year than they have been in the past, it's going to command a lower price today, even if its industry multiple stays the same. That's just the reality of the market." Sharp says those owners have two choices: accept today's lower prices or delay their sales for a year or two, until the company's financial results improve. Although that makes sense, it's a strategy that will pay off only if the industry's valuation multiples stay firm over time. And that's a gamble.
Any way you look at it, entrepreneurs with exits on their minds have some tough choices to make. "I tell my clients, 'Go right ahead and set the price. And I'll sell your company at whatever price you want -- even these days -- if you let me set the terms,' " notes John Johnson, a business broker at Bluestem Resources Group Inc., in Tulsa.
"Here's what that means," he adds. "If you're aiming for a price that's unrealistically high for this market, you may find yourself needing to accept a mostly stock deal. Do you want that? Or having to accept a long-term note with plenty of contingencies built in. Do you want that? Or having to sign a five-year employment contract to go work for your buyer. Do you want that? Or do you want to negotiate a nice clean exit that gives you cash for a price you can count on today? And if so, you'd better let me and the market tell you what kind of price tag makes sense."
There are exceptions, of course. Just as they could in the late 1990s, good companies can still command top dollar when their industries are in the throes of aggressive consolidation. Ron Massa, owner of the outdoor-advertising company, knew he was in the right place at the right time. "We're an industry that's experiencing very rapid consolidation. I didn't expect someone from outside the industry to buy my company, but I knew that someone in the business would take a look at my numbers and my location and recognize just how valuable my company was," he says.
Bull's-eye! Massa was first approached by someone who worked in the industry. "He wanted to buy my business himself, but in the end he couldn't get the financing," Massa recalls. "So instead he brought the deal to another company -- which was a third-generation billboard company -- with the proposal that they buy it and install him in management."
That's just what happened. In an all-cash deal, Massa received his full asking price, $1.26 million. Wondering what he's doing with all his free time? "Well, I actually owned a second billboard company, which I held on to," he says. "I've invested some of the money I received in new growth opportunities there. And I guess I'm going to keep building that business until I'm ready to sell it."
Few owners today are as lucky as Massa was. So here's another lesson worth learning for business owners who are enamored of an exit strategy: you'll never carry out a sale until you're prepared to look at your company the way a buyer would -- through a magnifying lens rather than rose-colored glasses -- and then respond accordingly. That's what the owners of the East Coast herbal supplier finally concluded. "There was an enormous amount of initial interest in this company because its revenues were quite healthy and it was profitable. But it was sitting on a lot of debt," explains Mark Romney, a business broker at IndustryPro, "and that scared people off."
The way a buyer looks at a company keeps changing according to whatever else is happening within the economy. Romney's clients learned that the hard way. During the days when the use of heavy leverage to achieve growth was considered a savvy management strategy, they used it to reach nearly $14 million in sales. Until fairly recently, they probably could have sold without a problem. But timing is everything. When the owners finally hung up their For Sale sign, potential buyers viewed the high level of debt as a downright deal killer. "The sellers and I both agreed that there was no point in actively marketing this company until they succeed in bringing down its debt levels," Romney says.
How's this for irony? Across the country, so many would-be sellers have pulled their companies off the market -- either by choice or necessity -- that business brokers and other deal makers are nearly running on empty. "There's a lot of interest from potential buyers. Those lower valuation levels add up to better-priced deals for them, and plenty of people are interested," says Marc Dosik, a business broker in the Columbia, Md., office of VR Business Brokers. "But our inventory levels are very low. Sellers are sitting on their hands. We're down to 40-something listings, when we typically have 80 or more."
News From the Front Lines
What's going to happen next in the business-for-sale marketplace? It's possible that today's imbalance between would-be buyers and sellers could push prices upward again, which would draw more sales prospects back into the market. That's a best-case scenario that may not happen anytime soon.
