Why Some Business Owners Think Now Is the Time to Sell
Looking back, Cyndi Finkle wishes she had sold her craft services company, Sunday Night Dinner, early in 2008 when the economy was booming. With a track record of 30 to 50 percent annual growth for each of the previous five years, it could have been a compelling transaction.
At the time, however, she was not emotionally ready to part with a business she had started in 1997 and built into one of the largest suppliers of services to television crews and casts in Los Angeles. When her husband suggested selling, “I burst into tears and looked at him as if he were telling me to cut off my arm,” Ms. Finkle said. “Then everything changed, and I realized he was right.”
But the recession hit, and Ms. Finkle’s annual revenue dropped sharply along with declining television advertising and production budgets — making it impossible for her to sell. “I’ve had to work really hard the last three years to save my company and get it back, a lot of times working for free,” she said. “It was no longer about building it, it was about keeping it going until things got better.”
Revenue for 2011 is finally back to 2008 levels, about $1.2 million, and Ms. Finkle is eager to sell. For one thing, she purchased another business, an art studio aimed at children, backed in part by a loan from the Small Business Administration. Moreover, the coming expiration of theBush tax cuts means that by the end of 2012, the long-term capital gains tax rate will increase to 20 percent from the current 15 percent (unless Congress passes legislation extending the lower rate).
Failing to sell before the end of 2012, she said, could cost her tens of thousands of dollars, “and knowing that motivates me to sell in 2012.”
Ms. Finkle is not the only small-business owner looking to the new year as an opportune time to sell. There is a pent-up pipeline of owners who have had to put off selling in recent years because of the economy. And now that many of these companies have at least one year of profits on the books, they are more attractive to potential investors.
“A lot of these companies are having record profits because they reduced their overhead in the downturn and now sales are coming back,” said John D. Emory Jr., chief executive of Emory & Company, a Milwaukee-based investment banking company that specializes in selling businesses with $10 million to $100 million in annual revenue. “A lot of owners have told me they want to start a sale process in the first half of 2012, hoping to complete the sale before the end of 2012. Many owners, especially the leading edge of the baby boomers, wanted to sell in 2008, 2009 or 2010 and would have sold in those three years had the economy stayed strong.”
Those looking to sell are taking steps to appeal to buyers: trimming costs, diversifying revenue, upgrading financial statements and making the chief executive’s role less essential. And they are braced for the sales process to take longer than they would like.
For most owners, the business represents their largest asset, and taxes constitute their largest single expense, saidMackey McNeill, a certified public accountant in Covington, Ky. “The ability to negotiate the best possible selling price and to minimize taxes determines the owner’s financial fate,” Ms. McNeill said.
To illustrate the impact of the expiring capital gains tax cut, Ms. McNeill created hypothetical companies that would sell for $5 million and $10 million each, assuming typical values for equipment, depreciation, real estate, inventory and good will. According to her calculations, and assuming Congress does not act, the owner would save $150,000 in taxes by selling a $5 million company in 2012 instead of 2013. For a $10 million business, the savings would be $325,000. These assumptions cover both S corporations and limited liability corporations, Ms. McNeill said. They would not be valid for a company operating as a C corporation.
The tax savings are an important factor in Joel Lederhause’s quest to sell a majority stake in DiscountRamps.com, a retailer of loading, hauling and transport equipment based in West Bend, Wis. “We won’t continue to grow 15 to 20 percent a year unless we have some outside capital influx,” Mr. Lederhause said. “We want some money to go into the company to accelerate its growth, and take a portion of our sweat equity off the table.”
The company, which projects $22 million in sales this year, keeps about $6 million in finished goods in its warehouse, which limits its growth potential. DiscountRamps.com offers 11,000 different products, and keeps at least one of each item in stock. With an infusion of capital, Mr. Lederhause said, the business could grow to more than $100 million in five years by expanding its product lines into promising new markets.
Dressing up for Sale
To make the company more attractive to investors, he has focused on cutting costs and maximizing profitability. As a result, gross sales have grown only 6 to 8 percent in recent years, but profits have quadrupled. “The economy hasn’t slowed our growth,” he said, “and that’s one thing that we can point to when we go out to potential investors.”
Steps taken include replacing outside contractors with well-trained staff; reducing credit card, shipping and interest costs; renegotiating payment terms with vendors; and replacing software systems with free open-source alternatives. He also made sure to understand the company’s financial statements backward and forward and to put the growth plan in his head onto paper. Documenting a vision for the company, he said, “is a lot harder than you think.”
To prepare for the sale of PartyPail, an Internet retailer, Edward Hechter and his wife, Lisa Jacobson, co-owners, have diversified the company’s revenue streams, added detail and structure to the books and cross-trained senior staff — all steps aimed at making the owners less integral to the business. “As a business owner, you should always be prepared to sell,” Mr. Hechter said, not only to take advantage of an opportunity but to protect your family and staff in case you are incapacitated. Despite the recession, the company’s revenue grew to $3.1 million in 2010, from $2.35 million in 2009 and $850,000 in 2008. Revenue of more than $4.4 million is projected for 2011.
Mr. Hechter says he believes that a clear investor presentation is critical to any acquisition. Members of his management team restructured the income statement to break out the profit or loss from each of the six e-commerce sites that PartyPail operates. They also refined the cash flow model to better project capital requirements and revenue. Finally, they started accruing annual expenses throughout the year and setting aside cash in anticipation of those costs to smooth out the financials and not have “bad” months when lump sums were deducted.
As part of a business survival plan, he has started inviting the marketing director and general manager into vendor and supply chain partner meetings, so they are more intimately familiar with how the business works. As a test of how well the company can operate without him and his wife in the office, they took six weeks away last summer, primarily on family vacations. The test went off without a hitch.
“I have a quote on my wall from my Grandma Tillie: ‘Success is when opportunity and preparation intersect,’ ” Mr. Hechter said, referring to the possibility of selling his company. “There’s no telling what will happen,” he said, adding, “Business owners don’t have the luxury of saying, ‘I’m going to change jobs.’ ”