While the past several years of historically low-interest rates helped support a red-hot market for companies being sold or raising money at soaring valuations, there have more recently been hiccups in the road brought about by interest rates hitting their highest levels in more than two decades.
The higher rate environment has created headwinds in capital markets, impacting venture funding, lending, and mergers and acquisitions. With capital becoming more expensive, investors and buyers have become more discerning with where they put their dollars to work.
Despite the tightening cycle that is shaking up a fair number of deals in the market, it may not necessarily mean bad news if you are currently wrestling with selling your company. In fact, some corners of the market are not only holding up but also continuing to see growth in investment and acquisitions.
For small businesses, the outlook has been especially optimistic as the lower middle market has been one of the busiest areas for acquisition activity despite the slowdown in larger corporate deals. Partly contributing to this is the agile nature of smaller companies, allowing them to adapt more quickly to economic conditions and thus be more resilient. Even larger institutional buyers, such as private equity funds, are increasingly focusing on acquiring small companies in recession-resistant niches.
The key to successfully exiting right now lies in a combination of understanding the dynamics in your industry and knowing how to navigate the sale process.
1. High-Interest Rates May Affect Selling Your Company
Buyers typically line up financing via outside lenders when a business is sold. If interest rates are high, those business loans are more expensive. That can reduce the incentive to invest or acquire in general and limit the pool of potential buyers. It can also make it difficult for buyers to secure loans or lines of credit to finance the purchase.
High interest rates can also result in lower business valuations. That’s because the discount rate in valuation models also goes up, driving future cash flow estimates down. For that reason, sellers need to be transparent about their business valuations when courting buyers.
Economic uncertainty also drags overall spending down in the consumer market. All business sectors feel the pain of that, and the business investment market is affected as well. However, companies in sectors that are still experiencing robust growth can still provide the return to make an acquisition possible in a higher-rate environment.
2. Small Companies May Have an Edge Amidst High Rates
According to Dena Jalbert, CEO of Align Business Advisory Services, which advises small and mid-sized companies on acquisitions, the likelihood of a successful business sale hinges on two factors — the business’s true market value and the types of lenders needed to close the deal.
Enterprise businesses — loosely defined as those that make more than $500 million in annual revenue — may be more difficult to sell in times of high interest rates. That’s because financing the deal likely requires lining up a “syndicate of lenders” consisting of multiple banks, financial institutions, and investors.
Such syndicates are severely restrained in today’s tight underwriting environment, making funding a large business sale problematic, if not impossible.
However, smaller companies are not bound by the complexity of syndicates. Typically, only one entity provides the loan in the sale of a non-enterprise business. Most acquirers are willing to remit larger equity checks to offset the higher lending costs.
“There is still a lot of dry powder available from private investors and corporations looking to make deals,” says Jalbert. “This will drive demand even though the cost of debt is higher.” “Dry powder” refers to capital that’s immediately accessible for investments.
3. Accounting Derails More Small Business Deals Than The Economy
During uncertain economic conditions, potential sellers need to be completely transparent about their companies’ financial history. Some companies have trouble articulating the reasons behind their business fluctuation owing to inaccurate record-keeping or flawed analysis.
This lack of knowledge can impact the valuation of the company being sold. When owners can’t explain their year-to-year business performance and changes, their quality of earnings comes into question. Buyers may dispute the company’s declaration of future value if a sizable variance isn’t accounted for properly.
Many private businesses have lax bookkeeping standards — and few audit themselves. As a result, they may unknowingly not be in keeping with generally accepted accounting principles (GAAP), which enterprise businesses must comply with. Murky bookkeeping is often one of the leading reasons that deals among smaller companies can be derailed or at least delayed.
The buyer is likely going to perform due diligence that the business may not have been subjected to prior. Outside accounting firms evaluate whether the seller’s financials are accurate for the buyer. If discrepancies or problems are found in the financial reports, the buyer may dispute whether the company is as valuable as first put forward.
With sellers reticent to lower the purchase price, buyers may walk away and frustrate all parties in the transaction.
4. Prepare Your Books Meticulously
Prospective sellers of smaller businesses must accept the accounting standards that large corporations must adhere to. In fact, Jalbert says, getting a jump start by integrating GAAP and committing to rigorous proactive self-auditing is very beneficial.
This involves making a fair and accurate assessment of the quality of earnings. This not only gives all parties a clear estimate of value and future earnings, but it lessens the chance that buyers will ask to “re-trade” or walk away from the deal.
To accomplish that objective, a private company may do well to bring in financial professionals to monitor their audits. “Financial accuracy is the most important issue in every deal. It’s worth the investment in a CFO and an audit to ensure there are no issues.”
Tips For Success When Selling Your Company
1. Prepare Early and Thoroughly
Success in selling your business starts with preparation. Begin planning at least one to two years in advance. This preparation involves streamlining operations, ensuring accurate and up-to-date financial records, and addressing legal or compliance issues. A well-organized business is more attractive to buyers.
2. Understand Your Business Valuation
Knowing the worth of your business is crucial. Engage with a professional appraiser to get an accurate valuation. This understanding will guide you in setting a realistic price and negotiating effectively with potential buyers.
3. Enhance Your Business’s Appeal
Make your business more attractive to buyers by demonstrating steady income streams, a strong customer base, and growth potential. Improving key aspects of your business, such as customer service, marketing strategies, or operational efficiency, can increase its value.
4. Get Professional Advice
Don’t go it alone. Seek advice from accountants, lawyers, and business brokers who specialize in business sales. Their expertise can help you navigate the complex process, from valuation to negotiation and legal compliance.
5. Maintain Confidentiality
Keep your intention to sell confidential to avoid unsettling customers, employees, and suppliers. Use nondisclosure agreements with potential buyers to protect your business information.
6. Market Your Business Effectively
A targeted marketing strategy is essential to attract the right buyers. This might include listing your business on relevant platforms, networking within your industry, and leveraging the expertise of a business broker.
7. Be Ready for Due Diligence
Buyers will thoroughly investigate your business during the due diligence phase. Be prepared with all necessary documents, including financial statements, contracts, and employee records. Transparency and organization during this phase can build trust and expedite the sale process.
8. Negotiate Strategically
Understand the buyer’s motives and be clear about your own priorities, whether it’s the sale price, the terms of the deal, or other conditions. Effective negotiation is about finding a win-win situation for both parties.
9. Plan for Post-Sale Transition
A smooth transition is vital for the continued success of the business. Be prepared to offer training or support to the new owner. This willingness can make your business more appealing and may even be a deciding factor for some buyers.
10. Consider Your Own Future
Selling your business is not just a financial decision but also a personal one. Consider what you will do post-sale. Whether it’s retirement, starting a new venture, or pursuing other interests, having a plan can make the transition easier for you personally.
Have a Vision and Execute for Success
While the market for selling a small business remains strong, it’s important to know your goals for a transaction and to think through the process thoroughly to achieve a sale. Selling your company successfully often requires planning far in advance of actually seeking out buyers. Avoiding pitfalls such as not having clean documentation and established processes to make your business a marketable asset is critical to maximizing what you can earn from your sale. Lastly, it’s important to consult professional expertise to guide you through the complex financial and tax implications that any sale entails.
Featured Image Credit: Photo by Fauxels; Pexels; Thank you.
The post 4 Considerations to Make Before Selling Your Company in This Economy appeared first on Due.
