Selling a Business during the COVID Crisis: An Update

A Business Broker representing the Seller is legally bound to represent the interests of that Seller, even if it is not always in the Broker’s own best interests to say or do some of the things the Broker is called upon to do. Frequently, changes in the market or even changes in the Seller’s own business can demand that we disclose information to our Client that any Seller may not want to hear.

Whether the Seller decides to act on the information that the Broker discloses, is up to that particular Seller. The Seller – the Client – always has the final say in whatever decision is ultimately made. The Broker brings his/her knowledge, experience and personal business contacts to the transaction, in many cases for the principal purpose of allowing the Seller to make those intelligent decisions for him or herself.

Changes in the market can occur during varying cycles in the economy, and they can also occur even seasonally. But there has been no change in the market that has ever occurred in the United States, that is in any way similar to what is going on now with the COVID crisis. Some people have likened this to World War II; however, even during World War II, people were allowed to get together in close proximity to each other. So, even though businesses may have slowed in many areas, only in rare instances where they ever shut down completely, or forced to close their own doors because of a complete prohibition of travel or the ability to assemble together in groups.

This crisis has obviously created a mammoth change and personal behavior, which has trickled down to every nook and cranny of our culture. Banking, as we discussed in the last post (https://wordpress.com/post/comBroker2.wordpress.com/82), has suffered along with the rest of us. But there have been certain updates since that last post, and that is the reason for this update.

We have continued to speak to any number of Banks, particularly those that cater to SBA lending opportunities, because that is where a number of our own Clientele sees the greatest success from purchases of their businesses. As we discussed in that last post, the majority of Banks are not extending any new loans – SBA or otherwise – because they are reserving the Bank Capital for refinancing or working out loans they currently have on their books. They are attempting at all costs to avoid foreclosures with those current loans, and attempting to find ways to work around what they hope will be a short-term crisis.

Many are still taking applications for business loans, but have no real intention of acting on those loans, at least at present. They are using those applications to formulate a waiting list of applicants, for future use. This is by no means an incorrect or unethical practice, unless they are giving the applicant the impression that the Bank is immediately, actively and aggressively working toward fulfilling that loan. And almost none of them are in a position to fund such new loan opportunities.

Banking itself is in a bit of chaos, not of their own doing, but because of what the COVID crisis is doing to the economy. To a very large degree, Banks’ lending practices and the interest rates associated with those loans are predicated on what is going on in the industry represented by each transaction in question. For example, in the 1980s, Gas Stations were suddenly required by the Federal Government to replace their underground gasoline storage tanks from the older, bare steel tanks, to the newer, more long-lasting tanks made of composite materials. Though in the latter 1980s when the economy was extremely upbeat, it became incredibly difficult to get financing for those Gas Stations to be sold, until the tanks were replaced and great care had been taken to ensure there was no pollution at the site, either as a result of the leaking previous tanks or during the replacement process itself. Banks are exceedingly risk adverse, and many Banks did not want to fund Gas Station transactions at all.

In the current situation, like the example of the Gas Stations, we can point to a specific onset of when the economic downturn occurred and the reason for such a decline. But unlike the Gas Station scenario, the COVID predicament represents an enormous financial collapse across many businesses in many industries. Moreover, the current situation makes it virtually impossible to project when and how much of an economic revival we can anticipate, over what period of time.

The Federal Government Stimulus is an extraordinarily positive and aggressive economic strategic move. Will it be enough? No one really knows. And importantly from a very short-term perspective, it is currently in bedlam. We spoke to one prominent Banker this morning about the stimulus in general, and the comment was that now, with only about a week of experience, the entire terms of the stimulus from a regulatory Banking perspective had changed three times. The first change came only an hour after Banks had received their initial set of governmental guidelines.

The net result is that the Banks are a bit frozen in indecision, not knowing whether the guidelines and regs that have most recently been distributed are in fact, the final say. The net result is that the Banks have this far done nothing. As far as can be told, with every Bank we have to date discussed this issue, not one dollar from the stimulus program has been granted or distributed.

This is not to lay blame on either the Federal Government or the Banks. It is a lousy, lousy situation, particularly for small business people that are desperately in need of such assistance. But the fact is that neither the Banks nor the Feds could ever conceive of a collapse this deep, with the stimulus this aggressive, and all the terms and controls that would be required to implement this kind of a strategic plan. That is to say, they are making it all up as they go along.

What this means to the Business Owner looking to sell at this point is that, depending upon the size of the sale and the demand for that kind of business model, the Business Owner may, and probably will need to act as “the Bank”, in funding the sale. Unless the business is small enough, and the Buyer is wealthy enough to be able to pay cash, there simply are very, very few alternatives.

No Business Owner wants to take a note! And frankly, we agree 100% with that philosophy. Our belief is that the current Business Owner took a risk when he/she bought or started that business from scratch; he/she should really not have to take a risk in selling it.

But the alternatives are not pretty, and none are to the Seller’s advantage. The first alternative is to simply refuse to sell at this point in time, and wait until the economy improves. The negative is that of course, as was stated above, we have absolutely no idea how long that could take. Moreover, no Bank will make a loan for any business that has Revenue and Profit that demonstrates a recent history of decline. The Bank would certainly understand that the decline was caused by the COVID crisis; but what they cannot forecast is how fast and to what degree the business will experience a resurgence. Or will there ever be a recovery? That uncertainty, that risk is something with which no Bank will deal. The Business Owner is then faced with the prospect of having to rebuild the business and proving, through Tax Return documentation that the business recovery has in fact taken place. So, if the COVID crisis ends at some point in 2020, the Business Owner is going to have to wait until he/she files Tax Returns at the end of 2021, in order to minimally demonstrate the value and perceived stability of that business.

The second alternative is really a function of the first, in that if the Business Owner decides to wait until the end of 2021 two list and potentially sell the business, one can only assume that many, many others will do the same. If a large number of businesses are placed for sale, all let’s say on or about March 1, 2021 after filing their taxes, there will be a potential glut in the market of businesses for sale. If the business in question is very unique, this may not be as much of an issue. But if the business is more of a generalized type of enterprise, the laws of supply and demand would suggest that a market glut of this type would radically reduce the value and resulting price of any business.

 

The third alternative is for the Buyer to potentially avoid Banks altogether, and seek Angel Investors or other types of private funding in order to make an acquisition. This kind of funding strategy is frankly not necessarily in the best interests of either Buyer or Seller, in most cases. The biggest, singular reason is that private investors would normally charge far more than what would be the rates demanded by the Banks. Any specific small business has an average historical Cash Flow on which prices are estimated. In this case, Cash Flow means the amount of money remaining after all Business Expenses have been made; this, then is the money with which loan payments (Debt Service) must be made and for which the New Owner can pay him/herself.

The Cash Flow is perceived as being very narrowly defined and very finite, in terms of dollars and cents. Therefore, if the Buyer is forced to go to a private lender, and that private lender charges a much higher rate than what might have been charged by a Bank, the rate of interest appreciably increases the Debt Service that must be paid by the Buyer on a monthly basis. And since that Cash Flow is defined in very finite terms, and since most Buyers see the income they require as being equally well defined, because they have their own home mortgages, utilities, car payments and credit cards that must be paid on a monthly basis as well, the only real variable is what they would be willing to pay for the purchase of the business itself. If Debt Service payments go up, their only recourse is to offer a lower price, so that the Cash Flow available to them remains at an adequate level.

Any price can be set by any Seller and his/her Broker. But the final sale will be dictated by whatever a ready and able Buyer is willing to pay. Having been in this business now for more than 20 years, it is still surprising how “the market” of Buyers normally arrives at about the same level of pricing.

There are ways to maximize a price through Seller financing. And there are any number of ways of protecting the Seller during this kind of financing process, if this is a route the Seller chooses to take.

Selling a business is always all about judging and acting on alternatives. Unfortunately, the COVID era has narrowed some of those choices. The wise Seller understands this well in advance, because no one likes these kinds of surprises!

 

(Receive in-depth, personal consulting online, with The BAF Group’s principal at https://clarity.fm/donaldbarrick .

The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service. Its Principal Broker possesses 25+ years of Business Sales and Divestiture. Although most of our work is involved in the Mid-Atlantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well. Some of our listings and additional information about us can be viewed at www.bafgroup.com.  Thank you for your interest.)

COVID 19 (Corona Virus) is Here: Is Now the time to sell my business?

Any crisis creates opportunity. In many circumstances, it depends upon your type of business that suggests whether opportunity has arisen, whether your Company or service can adapt to meet a potential opportunity, or whether the time is just generally lousy for you.  On March 30, 2020, now is the time to review this issue.

For Johnson & Johnson, sales of Tylenol have gone through the roof and it presents an incredible opportunity for that particular Company, among other, similar health-oriented manufacturers. On the other hand, healthcare companies in general are not necessarily doing exceedingly well. We are dealing on a superficial basis with the Company that produces and distributes equipment that is needed by patients with broken bones in their legs and feet. This Company is doing “okay”, but not swimming in profits at this point. The reason is simple: people are not participating in sports, running around outside as much as possible, or generally getting out and about beyond the house. Therefore, they have less opportunity to break those bones. The “market” for a lot of orthopedic products and services are therefore diminished at this point time.

Whether your Company is facing or enjoying increased profitability as a function of the virus and all its various impact points, really needs to be studied in detail. There is no question but that a large number of small businesses will fail as a result of the COVID 19 crisis soon, as a direct result of orders from various levels of government to remain ensconced in home. But there are probably also lengthier issues that might negatively affect a given business, such that more businesses will fail down the road. This latter series of failings may be due not to the direct actions by various elements of government, but by a complete change in business and consumer cultures.

An example of that may be the entire Movie Theater industry. With the growing popularity of services like Netflix and computer streaming of movies and other computer related entertainment, Movie Theaters were under siege and fighting to remain relevant. They were gradually adapting, changing their theater configurations, bringing in opera, ballet and other upscale events, adding alcohol bars and presenting Company-sponsored seminars and even live meetings in daylight hours, during the week. This gradual change has now been radically and immediately altered. Because of the abrupt nature of how people are now forced to alter their entertainment and local travel choices, no gradual change over can be performed. A “do or die” strategy is something that needs to be employed, and not only with Movie Theaters, but with countless other types of businesses.

So, a major question is, how do you make your particular business more relevant? If you are a restaurant, you obviously cannot put fannies in the seats, but you can do delivery. Or allow customers to place their orders by phone or computer, and pick up their orders. And if you do not have a liquor license with your restaurant, perhaps you can cooperate on orders with the local liquor store.

We dealt with a necktie manufacturing Company, at one point. Neckties certainly are not now being sold in any great quantity. But what about surgical masks and hospital gowns? What else could that manufacturer do that might keep them operational, and even potentially increase their Revenue and Profits? It in so doing, promotional opportunities become rampant!

Computer companies could have a heyday with this, because the move to teleworking in people’s homes has created a tremendous demand for video teleconferencing, or teleconferencing at any level. Hardware purchases could be on the upswing as well, as a direct result.

What is your business niche? How is the business culture changing? How can you alter your operational product or services to meet those needs, not only now, but for the foreseeable future?

If you are looking to sell your business, one of the most basic needs you have is to maintain current Revenue and Profits. A temporary dip can be explained, and we did this after 9/11, and more importantly and with greater difficulty, after the 2008 recession. But without some semblance of tangible recovery after the crisis has ended, no Buyer will want to purchase your Company until it has proven its recovery. Moreover, until that recovery has taken place and has stabilized, no bank (with or without SBA support,) will fund any Buyer’s acquisition of such a Company. Both Buyer and bank need to know that the Company is healthy, and that the losses that might have been experienced during the crisis, are over and were solely due to the COVID crisis.

This could mean that a Company that is unable to recover and stabilize would need 18 months to two years of return to prosperity, in order to demonstrate to the bank that it is worthy of loan consideration. Prior to that time, a Company could well be sold, but at an extraordinarily deep discount.

If your Company is presently still demonstrating some semblance of stability, despite this initial phase of the COVID virus crisis, the time to sell it would be now! A large number of businesses will be forced to wait until they return to some sort of economic recovery and normalcy, compared to the market at large. But that could potentially mean that in 18 to 24 months, a mammoth number of business could end up for sale at the same time. The sheer volume of that many being placed on the open market simultaneously, could well reduce the value by providing a glut of such opportunities in the market.

There is also every expectation – as it already has begun to do for Commercial Real Estate and Business sales – that interest rates will rise. Commercial Real Estate and Businesses are enjoying all time high pricing when sold now, because interest rates are low. But rising interest rates will depress the prices that can be demanded by Sellers.

This is an extraordinarily difficult concept to master, because again it must be done on a Company by Company basis. We are happy to have discussions about such circumstances with you, if you feel that to be appropriate.

 

(Receive in-depth, personal consulting online, with The BAF Group’s principal at https://clarity.fm/donaldbarrick .

The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service. Its Principal Broker possesses 25+ years of Business Sales and Divestiture. Although most of our work is involved in the Mid-Atlantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well. Some of our listings and additional information about us can be viewed at www.bafgroup.com. Thank you for your interest.)

Selling Your Business?

A recent (August 2016) survey performed by Pepperdine Graziadio School of Business and the International Business Brokers Association suggests that manufacturing businesses are suddenly, very much in demand. Manufacturers with Revenues of between $1 million and $50 million per year are selling quickly and at higher relative prices than at any time in recent history. The successful sale of companies of this kind appears to be far faster and with better pricing than service operations and distributorships, which have historically outpaced manufacturing by a substantial margin. Restaurants and service businesses still have the lead for sales under $1 million in annual Revenue, perhaps simply because they are more affordable for the small business person.

 

Normally, in an election year, Buyers would appear to be hesitant, and our business brokerage activity slows dramatically, particularly during the six months leading up to electionday. But for whatever reason, this year we have found an extremely active Buyer market. Certainly, one of the big reasons is the low interest rates that are available.

 

We also represent two (2) small manufacturing-oriented operations for sale, and the demand for these has increased dramatically, compared to activity we have seen from our other listings. Liquor Stores are a particular favorite in the retail market, but these have been difficult to sell over the past two years, because of premium pricing demanded by the Sellers. Demand for other Retail-oriented stores has been somewhat lower this year, for a variety of reasons. Restaurant sales have – as always – been fairly brisk.

 

If you or anyone you know has a business of their own and are thinking about retiring, now could be an ideal time, before the market changes and interest rates begin to rise.

(The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service. Its Principal Broker possesses 25+ years of Business Sales and Divestiture. Although most of our work is involved in the Mid-Atlantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well. Some of our listings and additional information about us can be viewed at www.bafgroup.com. Or, you may contact us at combroker@bafgroup.com. Thank you for your interest.)

Selling a Business: Timing is critical!

In 2007, we spoke to a number of Business Owners about selling their businesses.  We spoke to them about the potential for a recession looming around the corner, principally because of what we saw as the “bubble” in both Commercial and Residential Real Estate.  Many of them declined to sell at that point, stating that there businesses were simply doing “too well”, at that point.

As we moved into the deepest part of recessionary regression in 2008, many of those same people came back to us and then wanted us to sell their businesses, and sell them as quickly as humanly possible.  Unfortunately, as we looked at their Financial Statements, the erosion of their Revenue and Profits suggested that the value of their respective businesses had dropped tremendously.  They could no longer command the kind of Prices they might’ve enjoyed in 2007, and in some cases their businesses were unsalable, at almost any reasonable Price.

The moral of this is certainly not that we are blessed with some sort of crystal ball, and that what we say is tantamount to gospel!  But there are certain rules of thumb regarding the timing of selling businesses that cannot be argued.

First and foremost is the fact that if you own a business, you always – emphasis on the word, “always” – want to sell when you are doing “well”.  No one wants to buy your business when it is in a downward spiral.  And even when the Revenue drops slightly, it creates alarm bells for a Buyer and his/her Lender.

Buyers and Lenders ask for Financial Statements for the past three (3) years, to determine historical trends on which a buying or lending decision is ultimately made.  They want to see that the business has a stable financial record at the very least, and preferably shows growth throughout that trending period.  Any decline of any kind raises concern.  Is that decline a temporary one, or does it represent a larger, more long-term deterioration in business that will continue with the new ownership?  The current owner may explain the reason for the drop in business and the fact that the decline is essentially behind him/her, but Buyers and Lenders cannot and will not take such an explanation as gospel.

They need proof, and that proof can only be borne out by a return to normalcy, as exemplified by Financial Statements.  They are certainly not going to take the word of someone who’s business is in decline, and whose method of dealing with the difficulty is to get out.

This means that the Seller simply has to wait it out, rebuild profitability and then show financial statements that demonstrate the return of the business.  Depending upon how much business has been lost in the decline, this could mean waiting a full Fiscal Year of resurgent business, or more.  There are some mechanisms we have used to provide evidence that a business has been rebuilt in a credible way to a Buyer in less than a year, but Lenders are far more difficult an audience.  They will frequently require at least a year of evidence that the business has been rebuilt to a satisfactory level, and that evidence is just as frequently only supported by a Tax Return, to that effect.

A second element of timing has to do with interest rates.  When a Buyer makes a decision to buy a particular business at a particular Price, the amount of Cash Flow is one of the most critical issues.  Cash Flow, in this case is loosely defined as the amount of money the Buyer can project at the end of each year, after all expenses have been paid except what he/she needs to pay Debt Service, followed by whatever is left to provide him/her with a Personal Income.  Debt Service is further defined as what the Buyer will need to pay the Lender, on a monthly or annual basis, in order to purchase the business.

The Cash Flow is normally projected on the basis of historical profitability of the business, which obviously then goes back to the Financial Statements discussed above.  The relative certainty over the ability to project Cash Flow is obviously then why the confidence in the stability of Revenue and Profits is such a vital concern.

The projection of the Buyer’s Personal Income is something that can also be projected, with relative ease.  He/she knows what he/she pays in rent or house payments, car payments, utilities, average credit card payments, and so forth.  If the business is purchased through an SBA loan, the bank will demand this information, in writing.  The total of this amount is somewhat set in stone.

The amount paid for Debt Service is also somewhat set in stone.  With the amount of average Cash Flow, minus the amount of Personal Income the Buyer requires, that net amount that results is the money left for Debt Service.  From a Lender’s perspective, this is the dollar amount that is viewed with a certain amount of reverence.  The Lender will require that this amount equates to the monthly or annual Debt Service, normally plus about 25% to provide the Buyer with a certain amount of working cash reserves.

And Debt Service itself can be broken down into the sum of payments made toward Interest plus Principle.  This is where understanding the impact of Interest Rates is of critical importance to a business Seller.

Because we know that Debt Service is, as stated above, somewhat set in stone as a total amount, if Interest Rates rise, payments toward the Principal must come down, in order to meet that total.  Business loans are almost always amortized on a 10-year term, so reducing the payments for the Principal by increasing the amortization is not an option.  The only variable that remains is the Price paid for the business.

This means that, if Interest Rates rise, the Price paid for the business must come down.

This is where the politics of the US Government will radically impact any business that is for sale.  Regardless of whether a Seller is a Democrat or Republican, understanding the dynamics of changes in the makeup of the Senate, the House of Representatives or the Presidency, and the impact of such changes on the economy and the Federal Reserve system, is critical in understanding when it might be time to sell a business.

Finally, any recession is liable to wreak havoc on a business sale.  During recession of the 1980s, the Federal Government sought to ease the impact of the recession by devoting more resources in the way of SBA support to small businesses.  Virtually any economist around will say that small businesses led the recovery of the economy, during that time.  In 2008, the way the federal government dealt with the economy was largely to ignore small businesses, in favor of salvaging larger enterprises, such as AIG and GM.  Whether this was right or wrong will not be argued, in this essay.  But the net effect was the fact that small businesses suffered dramatically, and for a period of six months or more, the SBA was virtually out of business.  The only way to sell a business at that point in time, was for the Seller to take a note.

As this is being written in mid-2015, the effects of some of the policies and practices of that time are still being felt.  In many cases, Buyers cannot obtain an SBA loan from some of the largest, national banks; they are faced with going to local or regional banks to obtain those kinds of financing.

This post in our blog is being written well in advance of a changeover from the Obama Administration, but it is not too early for a Business Owner to contemplate selling his/her business before a new administration is put into place.  Selling a business takes time; it is not like flipping a switch.  The Business Owner that is been on the fence about doing so, should seriously think about doing that now.  The Fed has already hinted that interest rates will probably rise in the fall of 2015, which will then probably have a dampening effect on prices that can be demanded for any given business, regardless of how well they might be doing, at this time.

Moreover, for the reader that may be viewing this post well after the 2016 elections should take all of this to heart, because this philosophy will not only impact a changeover from President Obama to whomever succeeds him; it will impact any interim or general election that might take place in the future, as long as Interest Rates themselves are not cast in stone.

(The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service. Its Principal Broker possesses 25+ years of Business Sales and Divestiture. Although most of our work is involved in the Mid-Atlantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well. Some of our listings and additional information about us can be viewed at www.bafgroup.com. Or, you may contact us at combroker@bafgroup.com. Thank you for your interest.)