A Buyer's Market: What Is Your Business Worth Now?
You might expect Dennis Barnedt to be feeling somewhat down in the dumps these days, given that the economic slump is entering its second year. Indeed, whenever Barnedt, founder and CEO of Access Information Management, a records-storage company in Pleasanton, California, meets with peers in the industry, it's nothing but complaints about skittish lenders and the resulting lack of funds for expansion or even operations. "The majority of entrepreneurs I come across have either had their borrowing capacity limited -- or eliminated altogether," Barnedt says. He estimates that business valuations in his industry have dropped some 30 percent over the past 12 months alone.
But instead of getting depressed, Barnedt is doing something else: He is going shopping. Since August, Access has acquired two smaller competitors. And thanks to the combination of uncertain credit markets and falling prices, the company, which was founded as a roll-up in 2004, plans to add as many as eight more businesses over the next 12 months. "This has been a great opportunity for us," Barnedt says.
If you have been desperately searching for a hint of a silver lining in the current economic thunderstorm, here it is: It's a buyer's market for businesses. The median sale price for a private company fell 27 percent in 2008, to $400,000 from $551,000, according to data compiled for Inc. by Business Valuation Resources, a Portland, Oregon, provider of information about private-company transactions and the publisher of Pratt's Stats. For the sixth year, Inc. has partnered with BVR to produce our guide to valuing your business. The graphics, tables, and work sheet on the pages that follow -- which are based on 2,168 transactions from January 1, 2007, to March 31, 2009, in 122 industries -- can help you get a sense of what has happened to your business's worth in this economy.
Valuations, of course, are based on revenue and profits -- which, not surprisingly, also were down significantly last year: Median net sales for companies acquired in 2008 fell to $804,000, compared with $1.03 million in the previous year, according to BVR. In some industries, the decline was even more precipitous. Financial services, insurance, and real estate firms saw median net sales plummet 61 percent, to $1.2 million from $3.1 million in 2008. Service companies experienced a drop of 23 percent, to $634,000 from $825,000.
That decline appears to have spooked buyers and sellers alike. The mergers and acquisitions market nearly ground to a halt in the third and fourth quarters of 2008, according to BVR. And it remains anemic: In the first quarter of 2009, the number of midmarket transactions was 25 percent lower than in the like period a year ago, according to Dealogic, the financial data tracking firm.
So the market is not exactly frothy. But given that valuations are down sharply and that the shortage of credit is forcing otherwise stable companies to consider selling or taking on a partner, some businesses are signing deals that wouldn't have been possible in better times. Perhaps the most prominent example is Oracle's recent acquisition of Sun Microsystems for $9.50 a share, 40 percent below Sun's peak value 12 months earlier. True, few entrepreneurs are as flush as Oracle's Larry Ellison. But similarly steep discounts, according to our data, can be found in nearly all industries.
WHAT IT'S LIKE OUT THERE
"The biggest hindrance to selling a company right now is that the credit markets have almost completely shut down the process," says Andrew Cagnetta, president of Transworld Business Brokers in Fort Lauderdale, Florida. "Buyers and sellers have had to go back to the basics." For most brokers and buyers, that means setting aside amorphous notions of synergy and focusing on the bottom line. "The No. 1 question I get from people today is, 'How much money does it make? How much money can I put in my pocket today?' " says Jerry Tsai, a broker at Murphy Business & Financial in Sacramento.
It also means taking extra steps to manage risk. Julie Gordon White, principal of BlueKey Business Brokerage M&A in Point Richmond, California, is warning all her clients to take a harder-than-usual look at customer risk. Gordon White, who advises buyers and sellers of companies with revenue of less than $20 million, tends to be wary of any business in which the five largest customers contribute more than 25 percent of sales. "These days, you have to look at the customer concentration," she says. "What are you going to do when one of those customers goes away?"
Still, plenty of people are inclined to roll the dice. Over the past 18 months, for example, Steve Lipscomb, founder and CEO of the World Poker Tour, has seen the value of some companies fall as much as 50 percent to 75 percent. No surprise, then, that Lipscomb is eyeing the market carefully. WPT Enterprises, the publicly traded parent of the poker tour, lost $14 million in 2008. But the company is fortunate enough to have stowed away some cash, and Lipscomb has been seeing opportunity everywhere. Indeed, the buying opportunities are so attractive that Lipscomb is considering investments outside the entertainment area, in industries as far afield as green technology. "The capital markets have changed," says Lipscomb. "For investors, small, profitable companies are going to prove to be a good alternative to the stock market. There are an awful lot of great companies out there that just need a partner to help them weather the storm."
There are plenty of data to support Lipscomb's view, says Brian Hamilton, CEO of Sageworks, a financial information company that tracks financial activity among private businesses. A recent analysis by the company found that in three major sectors -- manufacturing, wholesale trade, and retail trade -- private firms are enjoying higher net profit margins and better return on equity and return on assets than their publicly traded counterparts. "Sales are down a bit at the average business," says Hamilton. "But these businesses certainly aren't tanking."
HOW TO GET A DEAL DONE
It helps a lot to have cash in your pocket. Business brokers report that cash deals typically yield discounts of 10 percent to 15 percent. If that option is not available -- and for most buyers, it isn't -- seller financing has become crucial. In previous years, Gordon White says, she would broker deals in which the seller would finance 10 percent to 20 percent of a deal, with the rest of the transaction in cash or incentives. Today, she says, that number has gone as high as 50 percent. "It's almost as if sellers today are taking the place of banks," says Gordon White.
Buyers are also getting more creative -- especially in terms of earn-outs, which increasingly are the norm in this economy. Under an earn-out, the seller agrees to remain with the business for a limited period and take a portion of the sale price in the form of future revenue or profits. "Because asking prices and multiples are down, you're seeing sellers assuming more of the risk," says Ross Whittaker, co-founder of Boston's iMergeAdvisors, a business brokerage that focuses on Internet companies. In this market, Whittaker says, he commonly sees requests from buyers for agreements that are equivalent to 25 percent to 50 percent of the sale price. And in many cases, sellers have little choice but to agree if they want to sell.
Favorable terms such as those have helped James Essey, president and CEO of TemPositions, a New York City company that operates staffing firms in 12 industries, realize his company's ambitious acquisition plans, which include buying several businesses over the next year. Over the past 12 months, valuations in the staffing industry have fallen 20 percent to 30 percent, says Essey. As a result, he is able to make acquisitions with significantly less money down. In December, for example, Essey acquired Vintage Personnel, an 18-year-old company in Queens. Essey expects to complete two other acquisitions -- including a company that saw revenue fall from $11 million to $3.5 million from 2007 to 2008 -- by midsummer. Essey structures a typical deal with a two- or three-year earn-out. Sellers receive approximately 30 percent of gross profits for each of those years, as well as a small advance against future earnings. "The entrepreneurs who sell to us are facing the likelihood that their business is going to continue to erode," says Essey. "I'm absorbing the expenses, and they're getting a piece of the profits."
Though the economy remains uncertain, Essey is bullish. The staffing industry has been hit hard by the downturn, but Essey believes it is ripe for consolidation. "We're looking at buying companies that, not very long ago, were doing much more business than they are now," says Essey. "With our help, when the economy comes back, I think these companies will be bigger than ever."