Justin W. Sandridge
We knew this would happen eventually, and here we are – the bear market has arrived.
Over the past few weeks, many small business owners have had to close operations, and unfortunately, for many, it will be for good. If your business survives, this will serve as a reminder of the importance of keeping cash in the company. Even with assistance from the government and from banks, survival until such help arrives requires capital.
All the calls I have received during the coronavirus pandemic have centered around one question: Can I still sell my business now or will I be able to sell it soon after this is over?
My explanation of an exit strategy after this crisis will look different from what I proposed two months ago. Here I will outline the changes and challenges I see for the small business owners who want to sell in the next few years.
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- Valuations. When valuing a company, we calculate if the business cash flow is enough to support the buyer’s lifestyle and if it will be able to service the debt, ideally with an SBA 7(a) loan. We prefer the SBA-guaranteed loan because of its low interest rates, its flexible terms (up to 10 years), and a small 10% equity injection requirement from the buyer. In the future, values will be suppressed if people cannot borrow money, if interest rates rise significantly, or if the equity requirements are raised substantially.
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- Seller financing. Currently, banks are emptying their balance sheets to help existing business owners survive. The SBA is now focused on providing disaster relief. It is unclear when the SBA will start assisting with acquisitions again, and when they do, what the new requirements will be. For now, those wanting to sell their small businesses soon should seriously consider financing 70% of the business sale to a qualified buyer.
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- Revenue. No one is going to buy a business until it reopens. Once it opens, buyers are going to wait and see if monthly revenues come back to what they were prior to the pandemic. If so, when evaluating your business, it is acceptable to recast the numbers due to the shutdown to show what a realistic cash flow looks like going forward.
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- Buyer’s market. Many business owners will decide to exit soon. With the amount of businesses for sale, buyers will have more opportunities to choose from, which also will suppress business values. With seller financing expected to be the norm, buyers will use this advantage to get into a business without the red tape of traditional funding. We already anticipated baby boomers retiring this decade, but given this unprecedented event and their older demographic, many will not want to wait for a full economic recovery.
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- Main street businesses will sell. With sellers expected to hold a note, sellers should anticipate a 30-50% down payment on the price of the company. Because of the increase in the down payment requirements, buyers will only be able to buy smaller businesses. Before, a $100,000 cash down payment could allow a buyer to purchase a $1,000,000 company using SBA 7(a) financing. Now, using seller financing, the same $100,000 down payment will only allow a buyer to purchase a $350,000 business. Most main street businesses trade under $500,000.
Only time will tell where everything will settle. It depends on how soon the quarantine ends, which will determine how quickly we recover. How government policy changes, how banks assess risk, and the future of the SBA is anyone’s guess, so exiting a business will not look the same as it did in the recent past.
I encourage all small business owners to connect with a business banker or a CPA to help navigate through the options available. If you don’t have relationships with these financial professionals, feel free to reach out to me and I will connect you with people who can help.
Being an entrepreneur is the hardest job on the planet. If it were easy, everyone would do it. Buckle down and remember that time under tension creates strength. Growing from this experience will make you better prepared for the challenges ahead and for the opportunity to help someone else.
Be great,
Justin Sandridge, CBI
Murphy Business Sales – Baltimore
j.*********@mu************.com
410-558-6365
