Experts say it’s a seller’s market for businesses in Delaware right now.
“Dollar for dollar of profit, you can get more for your business right now,” said David Bernstein of RLS Associates, a Wilmington investment banking firm specializing in mergers and acquisitions. “There’s more money for deals than there ever has been. It’s a seller’s market.”
Bernstein said four types of businesses are perennially popular with buyers — manufacturing companies with proprietary content or strong product lines, companies that create management systems for health care providers, proprietary chemical companies and service businesses.
No matter the type, the businesses that are most valuable are those with growth potential. “No one buys a business to keep it where it is,” Bernstein said. “Buyers look for sustainable, transferable profitability. What drives value is what I can make from it as a buyer.”
Bernstein was one of the experts gathered at an Aug. 4 seminar presented by Delaware Small Business Development Center, Wilmington Trust and Delaware Business Times.
Many business owners have an “eye-of-the-beholder problem” when they get ready to sell, said Michael Bowman, director of the Delaware Small Business Development Center. The best exit strategy is to start planning how to make your business more attractive to buyers a few years before you plan to sell or retire, he said.
Judith Scarborough of Master Sidlow & Associates, the Wilmington accounting firm, said business owners need to face a universal truth — you will leave your business.
Scarborough said fair market value is actually whatever amount a willing buyer will pay. What do buyers look for? She used this definition: The value of the business is the present value of the future cash flow.
“Maximize assets that will drive your price up and minimize the factors that will drive your price down,” Scarborough said.
The speakers said buyers will be looking at several factors:
• Is the business part of a growing industry, a maturing industry or a declining industry?
• How does the global economy affect your business?
• What equipment comes with the business and how old is the equipment?
• What is your business’s reputation?
• Do you have any proprietary processes that might be worth money?
• Do you have a deep management team ready to take over when you leave?
• Are your products or services diversified?
• If you leave the business, will your products or services be diminished?
• Are there outliers on your balance sheet — extraordinary salaries for you or your family members? Some owners take small salaries but do the work of three people. A new owner would have to pay three salaries if you were no longer on the payroll. Some owners pay themselves or relatives high salaries for no-show jobs. Those high salaries will weigh down the balance sheet unnecessarily.
• Is your business marketable as is? Are the buildings in good repair?
• Is your staffing justified? What is your revenue per employee?
• Is your customer base diversified or are all your eggs in one corporate basket? If you have only one client, that can be a deal-killer. The most marketable businesses have less than 10 or 15 percent of their sales from one account and less than 30 percent of sales with their top five customers.
• How strong and deep is your management once you leave the building?
• What is your tax liability?
Bernstein said owners must be strategic about when they exit. Your company is most attractive when it is stable and growing.
Before you sell, spruce up the premises, he advised, and clean up your finances a year or two or three before you plan to sell.
And, when you get an offer, don’t be swayed strictly by the dollar amount. The most important part of the contract is the terms. When will you get your money? What interest will you get on any loans you offer? Bernstein said he’s seen scenarios where the previous owner still is holding all the risk for the buyer.
“Never, ever, allow yourself to be fooled by the number and not look at the terms, because the terms are everything,” Bernstein said.