2011 Business Brokerage Market Expanding

Based on my own observations from more than two decades in the field of business brokerage and mergers and acquisitions, many small businesses that survived the economic downtown are now seeing renewed strength in their top-line revenues, and solid or growing bottom-lines. In fact, the bottom-line cash flow for a number of businesses appears to be healthier than the top-line sales.

While this doesn't mean all companies are back to pre-recession performance levels, entrepreneurs are likely to see new options for their business next year, thanks to an expected increase in bank loans and a larger pool of potential buyers.

Here are my four predictions for this year that could affect the sale of your company.

No. 1: Large Pool of Potential Buyers
There is expected to be no shortage of business buyers in 2011. That's because there are a growing number of unemployed (or soon to be) middle- to senior-level executives who are likely to decide that buying a business is a feasible alternative to looking for a job.

While potentially more capital-intensive, these buyers realize that purchasing an existing business with revenues, clients, trained employees and cash flows could allow them the best possibility to sustain their lifestyle in the ab-sence of concrete employment options. However, these individuals would be wise to keep their options open (employment search, start a business, or buy an existing business) in case the right deal doesn't materialize.

No. 2: Bank Lending on the Rise
Based on current and anticipated behavior, banks are expected to come back to the lending market for small-business acquisitions. From a business broker perspective, it's been quite some time since bankers called to source deals. The good news is that they have started calling again.

While many of these deals are smaller in size, this still bodes well for 2011. Businesses with adequate cash flow will ultimately see more overall activity in terms of bank lending this year.

No. 3: Increase in Business Valuations
Valuations are likely to increase for businesses with solid fundamentals. This may sound counter-intuitive, given current market conditions, but it's basic supply and demand. There are an inordinate number of prospective (and qualified) buyers in the marketplace chasing a small number of healthy businesses. It's not uncommon for good companies to attract a large number of buyers, which results in an auction-type atmosphere where buyers bid up prices and terms.

This dynamic will not face a major change this year. Business owners who are emotionally and financially ready to sell will be the benefactors of this lopsided market.

No. 4: Baby Boomers Will Start Selling
Back in 2007, one in every two baby boomers -- who control almost 8 million small businesses in the U.S., according to BIGresearch -- was expected to begin selling their businesses. This trend was on track until the recession hit. However, these boomers will retire soon and could revisit a sale.

When that happens, there will be a sharp increase of businesses on the market. The supply and demand dynamics will shift heavily in favor of buyers. At that point, sellers will need to be exceptional in order to secure a good price for their business.

Regardless of how 2011 plays out, one prediction will certainly hold true -- businesses that take the proper steps to prepare for a potential sale will have a much better chance of achieving a successful exit than those who don't.

Why Sellers Stay Involved.

If you think that you might not be carrying a note for a portion of the purchase price...


1. All SBA lenders are requiring a minimum of 10% from sellers with interest-only for five years. Then the seller can get the balloon payment after five years. If a buyer has no experience in the industry but good management experience, they will require more down payment and most likely a larger noter from the seller to reduce the bank's risk.

2. If the buyer uses other financing and does not ask for a note, they will most likely require a hold-back of at least 10% of the purchase price. This hold-back will be for up to 12 to 24 months in order for the buyers to have the reps and warranties guaranteed. If buyers find something that was misrepresented during that time, they have at least the hold-back amount to "offset". The offset is not limited to the hold-back amount but protects the buyer for a period of time.

CLEAN IT UP!!!

Well it just happened…. I am always advising potential sellers to have their books cleaned up, their files in good order, etc. before putting their business on the market. I am representing the buyer and co-broking with another broker in another office. It started off wrong. The broker would not provide the Trailing 12 month financials. This is an easy thing to get if one is using QuickBooks. We made our offer contingent on getting those numbers, which showed us that the last 12 months were down 20%. We still moved forward…

When due diligence began, the files were a mess. The Seller gave the Buyer incomplete employee files and wasn’t sure where two of the employee files were…RED FLAG… The sub-contractor fees were $100,000 higher on the tax returns than were reported on the P &L’s… RED FLAG. The 1099s that were given were the red copies which are the ones that are suppose to be filed… Were they filed? RED FLAG. The
Tax return showed a combination of his wife’s business and his business. Now we also need the wife’s business financials so the tax returns make sense.

When the Buyer inspected the equipment and vehicles, only one vehicle was insured out of five total, and one quarter of the equipment needed to run the business was in need of repair, which will amount to over $10,000. There also was a new fee that has been imposed for the equipment that will add $850 per month in expenses.

In summary, this deal will never happen, and it didn’t have to be this way. If the broker had advised the Seller to get his ducks in a row prior to listing this business, it would sell. It is in a hot industry. The Buyer REALLY wanted it to work out, and even if the price is lowered considerably, now the Buyer really doesn’t trust anything that he is given due to the mess the business is in.

Before selling, get things in order. Look at your business as if you were a buyer. Would YOU buy it the way it is now?

Don't Let the Buyer Run the Show!

I just closed a transaction a month ago in which we thought we had a great match. The buyer was quite confident, aggressive, and not demanding at all of the seller.

The parties agreed to four weeks of training. After two weeks, the buyer told the seller, "All is well. We can handle it from here." In effect, they were saying "Don't call us; we'll call you."

Meanwhile the seller is home receiving phone calls from the employees saying, "She thinks she knows everything. She isn't warm and open like you. I think I'm going to get my resume out there."

The moral of the story: Stick around and help make a smooth transition. Key employees need to feel valued, safe, and respected. Educate your buyer ahead of time about the personality of each key player so they can begin building rapport gradually. Most sellers will be carrying a note, so they definitely have a vested interest in the success of the new owner.