OCEAN CITY — It may seem improbable given some of today’s financial headlines, but the deal market for small and midsize private companies has come to life, and many entrepreneurs who’ve spent decades building companies are taking advantage.
Last week we looked at the buyer side and this week we review the sell side where the conditions for deals are prime as well.
With members of the baby boom generation and its legions of entrepreneurs now hitting retirement age, we’re likely to see more businesses changing hands. Having lived through the financial crisis and the recession and now facing an uncertain regulatory future, some veteran owners have grown fatigued, says Paul Waters, COO of the Referral Network. Their weariness, he explains, is making them all the more eager to cash out on the businesses they spend their careers building.
Sellers may also be seeking to take advantage of the most taxpayer-friendly environment in decades. Currently, the long-term capital gains tax rate is at 15%. The fear that it could rise as high as 30% in the years to come heightens the urgency of those entrepreneurs considering a sale.
Because of the complexities involved, it’s never too soon to start getting a company ready for a sale. The first steps involve viewing the business as critically as any outsider would. Often enough, just as with selling a house, the alterations needed to attract a buyer go beyond mere decoration.
Before going to market, for example, many businesses can benefit from a dose of financial housecleaning: accounts receivable scrubbed, obsolete inventory eliminated, troublesome clients or suppliers dropped, and financial reporting bulletproofed by third-party auditors. The complexity of a company’s ownership structure will need to be taken into account. If a company has 10 different owners, for instance, it could take more effort to cultivate the motivation to sell. Owners need to understand how companies are valued within their specific industry, and to strive to position their businesses as much as possible to enhance those key metrics — whether it’s sales per employee, sales per square foot, utilization ratio, cost per click or circulation.
Next week we examine the concept of securing a deal team to help with the buying and selling process.
(A Merrill Lynch Wealth Management Advisor. She can be reached at 410-213-8520.)