It’s no secret that the landscape for selling a business has not been particularly favorable for business owners, particularly in an environment where interest rates have substantially increased and where banks have moved to tighten lending requirements. This situation, along with the prospect of a recession in the not-too-distant future, has created headwinds for owners of small to medium-sized businesses who are planning for retirement and wanting to monetize what is most likely their largest asset by selling their business.
In fact, an accelerating number of business owners in the baby-boomer generation are interested in exploring alternatives to sell their businesses. Recently, a 2023 BizBuySell’s quarterly Insight report presented a survey of business owners and business brokers. The survey revealed that 31% of baby boomer respondents indicated that now may be the right time to retire as businesses recover from a challenging 2020. Furthermore, 45% of business owners say they are, in fact, selling their business to retire.
While the current environment may present certain challenges to business owners who are planning to sell their business, there are also advantages as well. Capstone Partners, for example, recently released their Q1 2023 Capital Market Update that summarized first-quarter middle market merger and acquisition activity. They indicated that middle market deal volume declined 14% in Q1 2023 year over year, although the decline in middle market deals was much improved over the broader M&A market volume that declined over 25%. Capstone’s update revealed that buyers demonstrated increased selectivity, demonstrating a higher interest in quality companies with strong margin profiles, and the buyers were willing to command M&A interest at premium valuations. Capstone’s report indicated that the average middle market EBITDA multiple amounted to 9.1x in Q1/23, which represented a significant increase from Q4/22’s multiple of 7.2x.
While sellers oftentimes focus on multiple valuations or their own perception of what their business is worth, it’s important to understand the reality of the value of the business and work diligently to improve its worth ahead of putting it on the market.
Revitalization Partners has had substantial experience in helping business owners sell their businesses, and we advise them it’s important to develop a plan to improve value in advance of a sale. Developing a plan at least a year in advance to improve the EBITDA of the business is incredibly important. EBITDA improvement takes time to implement and is seldom accomplished without a plan.
Remember, for every $100,000 that EBITDA can be sustainably improved, the value of a business improves by $500,000, assuming a 5X multiple. Improving the performance of the business in advance of a sale can have a significant impact on improving the value a business owner receives and can be an advantage in negotiating with the potential buyer.
Business owners can set a target for EBITDA improvement and work with the management team to execute strategies that will accomplish their goals. EBITDA improvement can come in many different ways, including gross margin improvement, targeted marketing campaigns that are focused on increasing revenue, and strategically reducing or renegotiating expense reductions that will improve the bottom line.
Business owners can also improve their overall return and cash received when they sell their business by negotiating terms that are favorable. For example, after a total purchase price and valuation are negotiated, providing a seller note that is secured by the assets of the company can increase the overall return to the seller. In today’s high-interest environment, the interest on a seller's note will most likely be higher than putting cash in the bank. Thus, the seller would increase their return for the overall sale. It’s important to work with an attorney to make sure a seller's note contains provisions that protect the seller’s interest. Including a seller’s note as part of the transaction can also have income tax advantages if structured properly. It’s important to obtain advice from a tax advisor to consider options for minimizing income taxes.
Furthermore, the seller might also negotiate a consulting contract with the buyer to assist with the transition and to ensure the buyer has the benefit of the seller’s experience as they move forward.
Even though the current business climate may be somewhat challenging, it should not discourage a business owner, particularly a retiring business owner, from considering selling their business. Putting together a plan and process to prepare for selling the business, which includes improving EBITDA, documenting steps required to prepare for a sale, and selecting competent legal and business advisers, is key to preparing for the best possible outcome. And don’t be afraid to ask for help at the beginning of the process to improve the odds of success.
Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering, State Receivership, or Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.
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