Thomas K. Warburton
Warburton Capital Management
The Following is an excerpt from the Bluestem Resources Affiliated Group, LLC
Supply and Demand-The basic forces of economic nature. Many of us studied these concepts decades ago in entry-level economics courses at universities where we were distracted by the opposite sex and intoxicated by the freddoms afforded while pursuing a college degree. We may have considered that we woul done day own a business, but did we ever consider that we would sell a business.
Well, now its 2009. Many of us captured the spouse of our dreams and have parented college student sof our own. Over the years, we built a business thorugh hard work, determination and unadultersted stubbornness. Now we are getting in touch with our own mortality. We realize that somebody else is going to own our business someday and we intend to exercise maximum control over that transaction.
Let's revisit our college days and the lessons of our Economics Professors. Specifically, How Supply And Demand Impact Selling A Business From The Buyer's Perspective.
The Supply/Demand relationship between business Sellers/Buyers has remained constant through the ages. Business owners "Supply" enterprises that generate "Free Cash Flow" and business buyers "Demand" that "Free Cash Flow" at prices (multiples) that make sense. Prices (multiples) expand and contract for a variety of reasons beyond the scope of this article, however, I would like to focus on one phenomena that impacts a Buyer's decision of "how much to pay" = Access To Capital.
Business Buyers require Access To Capital because they generally utilize Borrowed Funds to finance a transaction. When access to capital is plentiful...buyers willingly pay more to acquire Free Cash Flow Because The Can. Likewise, when access to capital is low buyers pay less because they can't fiannce transactions.
At the risk of being obvious, "The Current Credit Market Is Having A Huge Impact On All Things Economic". Loans are viewed as "edgy" today that were "a laydown" only 12-18 months ago.
The grid below presents the universe of possibilities for Bankers (Supplying Capital) and Business Buyers (Demanding Capital):
The Merger & Acquisition Industry (which matches Willing Buyers with Willing Sellers at Reasonable Prices) is confronted with a Credit Market bogged down in box "C". This makes transactions difficult.
THE BANKERS PERSPECTIVE - I have many friends who are Commercial Lenders with prominent local, regional and national Banks. The temperature of these Lenders is consistent and characterized by comments like " we are not making many loans today", "our credit committee is reluctant to loan money" and the tour de force of negativity "we can't even get a good loan through a committee".
THE BUSINESS BUYER'S PERSPECTIVE - Business Buyers are enjoying an overwhelming supply of opportunities to consider. Aging Baby Boomers have spent the last 30-40 years of their lives building businesses that they now want to sell to finance their retirements. There are more privately owned businesses for sale today than there have ever been and the credit markets are frustrating Business Buyer's efforts to fiannce transactions.
So, the logical question is, "How Can I, The Business Owner, Hoping To Sell My Business At An Attractive Price, Get A Deal Done?" I have only one suggestion = Engage An Experienced And Professional Merger And Acquisition Firm.
A Professional Merger and Acquisition Firm will perform many valuable service:
- They will tell you "if your business is ready to sell". Taking your company to market with shoddy financials or poorly capitalized is an invitation to frustration for a seller.
- They will tell you "what your business is really worth". Forget about the emotions and all the years you've invested. Your business is worth "a number".
- They will "approach and pre-screen prospective buyers". Finding a willing buyer is useful only if that buyer can close the deal. Recently a buddy of mine invested 9 months of his life attempting to sell his business only to have the deal blow-up at the closing table because the buyer couldn't get financing and wanted him to "carry back" a substantial portion of the purchase price subordinated to senior debt.
- The will "negotiate deal terms". The price you will get for your business is important, but the negotiation of the employment agreement, the representations/warranties and other terms could come back to haunt the seller if not handled appropriately.
- The will "get the deal to the closing table". The complexity of events and emotions that occur between "the offer" and "the closing" will inspire frustration and rage that require more than a little of the objectivity provided by A Professional Advisor.
In closing, supply and demand will affect your ability to sell your business. If you want to sell your business today there is some good news and some bad news. The bad news = Supply Of Capital. Credit Markets are making it tough to get deals done. The good news = Demand For Businesses. There are an enormous number of qualified buyers anxious to buy good businesses if you get to them...and they can get the deal financed.
