Start your engines — there hasn’t been a better time to race to the finish line in years. With 10,000 Baby Boomers turning 65 each day for the next 18 years, younger boomers are looking to buy businesses from those ready to retire.
Not only that, but the economy has roared to life — or at least cruising speed — which only accelerates interest in acquisitions.
“The two real drivers for getting transactions completed are confidence and availability of capital,” said Ron Chernak, president of The FBB Group Ltd. and founder of First Business Brokers Ltd., one of the state’s largest brokerage companies. Chernak has overseen the sales of more than 900 businesses in a variety of industries.
“Because of the rising economy, buyers are more confident … and banks are more willing to loan money for deals,” Chernak said, adding that near-historic lows in interest rates make the situation even better for obtaining capital.
Last year, between July and September, 1,685 small businesses were sold nationally — an increase of about 30 percent over the same period in 2012, according to BizBuySell.com.
Mergers and acquisitions have increased recently, “so if an owner has a desire for an exit strategy, there’s a large number of private equity firms with capital available and interested in acquiring closely held businesses,” said Carol A. Lewis, partner and head of BKD’s national forensics and valuation services division.
“Buyers out there are looking for an opportunity,” Lewis said. “They’re ready to do a deal.”
Preparing to sell
In her book, “Sell Your Business for More Than It’s Worth,” Michelle Seiler-Tucker recommends that business owners move from mere brand awareness to brand insistence or, better yet, brand advocacy — when people recommend your brand to others — before selling.
In addition, she suggests that sellers find a business broker. But not any one will do; he or she needs to have a proven track record. Prospective brokers ought to be able to show testimonials, how many businesses they’ve sold, which industries and their closing ratio, she wrote.
In an interview with the Business Journal, Chernak shared his top five tips to help increase value and marketability for a business.
1. Maintain excellent financial records. Most owners need to start preparations two or three years before they want to sell. Financials, including balance sheets and income statements, need to be in top-notch condition. Lenders and buyers typically look at a three- to five-year window of financials for determining the financial stability of a company.
“Good numbers sell businesses faster for more money,” he said. Financial performance records must include profits and growth trends, formatted by a certified professional accountant and preferably also audited or reviewed. “This gives buyers more confidence that financial records are accurate, and the lender also gains more confidence, so they’ll loan more money,” he said.
2. Hire or groom second-level management. When the owners leave, who will be running the business? If the entire leadership team will exit after the sale, buyers will be skittish. “Brain trust goes out the door,” Chernak said.
3. Reduce customer concentration. Companies with customer concentration of more than 10 percent will “raise eyebrows. More than 20 percent causes concern and may reduce the value of the company,” he said. Potential sellers would do well to have several big clients or many smaller clients. Also, Chernak said long-term contracts can “mitigate the customer-concentration issue.”
4. Assemble an experienced acquisition team. For most transactions, this would include a transaction attorney with experience selling businesses, an accountant/tax adviser, an intermediary such as a broker, and a financial planner — especially if the seller is older and needs the sale money for retirement.
5. Commitment to the process. Preparing a business for sale may take one to two years. In addition, it often takes nine to 12 months to sell after being put on the market — up to two years for more complex transactions. After the sale, the transition period can last from 30 to 90 days, or one to two years for larger businesses.
A buyer/seller perspective
Ten years ago, Brad Brunk wanted to buy a business. He specifically did not want retail or a restaurant, but he did have construction experience. After searching online sites, a listing at First Business Brokers caught his attention: a full-service metal fabrication company with a good clientele base. After meeting with Chernak and pre-qualifying, Brunk met the general manager.
“I got a real good comfort level with him, and he said he would stay,” Brunk said. “I knew he’d be an important part of the team.”
Brunk bought Sigma Metals Inc. in 2003, with the intent of selling it after 10 years. That’s precisely what happened. In early 2013, Brunk met with Chernak to discuss valuation of Sigma and assess the company’s financials and tax returns. Then Brunk listed the company with First Business in May.
For Brunk, the sale process went more quickly than usual.
“We had probably three showings in less than two weeks, and one of those made the offer, and we negotiated,” Brunk said.
Another serendipitous circumstance: The deal, which hinged on a Small Business Administration loan, closed right before the government shutdown, or it would have been another month or two with delays.
Brunk said the decision to use a broker to sell his business was common sense.
“With so many balls in the air, lenders, attorneys, environmental studies, the SBA part, you could end up shortchanging yourself,” Brunk said. “Ron works well, making sure the buyers are on track and keeps the process going. He is so knowledgeable and does a great communication job. You could try it on your own, but I think in the long run we came out with a better deal for everyone by working with an experienced broker like Ron.”
Brunk recommends that business owners who are ready to sell should select a broker and start the process early.
“The grooming process is important and takes time. You can’t change a balance sheet overnight. It’s not going to be a quick process,” Brunk said.
Chernak would agree: “You need to give yourself time, plan ahead, and prepare and be patient. We were very fortunate to have a contract within 30 days.”
Four months later, the deal closed in September.
For business owners who want to retain their customers and employees — while not giving their competitors any advantage — confidentiality throughout the process is crucial. Imagine the havoc of having employees and clients know the business is for sale. It can cause a solid, stable company to lose valuable employees and even long-term clients.
Using a broker eliminates that danger, as the initial inquiries and questions are fielded by the broker.
“There are a lot of moving parts,” Chernak said. “Depending on the nature of the business, it can be complex.”
Not to mention behind-the-scenes work. For a larger, more complex transaction, it’s quite possible to have more than 1,500 emails between the broker, attorneys, accountants, buyer, seller, lenders and advisers.
For these reasons, Brunk wanted confidentiality and a broker.
“We chose to keep it all confidential — from employees and customers,” Brunk said. “All your showings and appraiser visits have to be after hours and on weekends, to make sure it doesn’t raise any questions. It gets kind of dicey.”
In the end, it worked out well. The deal went through, the employees stayed, so did the clients — and business is thriving.
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