Recession

C. G. R e i c h e r A s s o c i a t e s

Selling a Business During a Recessionary Period

During a recession, virtually all segments of industry experience a period of lost revenue and depressed profits. Customers become skittish, usually reducing or postponing their purchases. Lines of credit become stretched, and banks become less receptive to increasing credit. A recession also skews one of the key determinants of business valuation: the seller’s discretionary cash flow. With falling revenues and profits, it is more difficult for a company to generate the same cash flow during a recession as it had in the previous two to three years. It is also difficult to determine when those previous revenues and earnings will return. All of this increases the buyer-side risk and sometimes translates into a lower price for the business.

Yet, even in a recession, selling your business could produce outstanding results based upon two realities:

n Quality sells in any economic market.

n The value of closely held companies is most often determined by internal attributes of the business and less from external economic factors.

The quality of a business, as perceived by a buyer, can be enhanced using a number strategies (see article: Planning a Long Term Exit Strategy).

So what can you do as a seller?

n Wait it out. If you have the energy, redouble your efforts at working the business and becoming more efficient. Build stronger relationships with your customers and vendors. Be extremely attentive to your AR/AP. Slim your inventory where appropriate. Be cautious about labor reductions: wherever possible, trim hours rather than dismissing personnel (you have already invested time, energy and resources in employee training---when it is time to ramp-up, it is more cost-effective to increase hours than to re-hire and train new employees). Maintain strong communication with your banking partners. Then, as the economy improves and profits are restored, move forward with the sale. Businesses that survive a recession can recover their pre-recession value if they can show that customers have returned and revenue has rebounded. Buyers recognize that only the strongest businesses survive economic downturns.

n Go forward with the sale---and be open to creative deal structures. With the distinct potential for reduced bank financing, nearly every recession-era deal structure will involve some form of seller financing. In some deals, sellers may decide to offer a sizable percentage of financing because of the buyer’s trustworthiness and expertise. In those cases, normally a larger down payment is required and the seller may stay with the company for a greater length of time as a partner or consultant.

Many recession-era deals include a performance-based earn-out, particularly if the company is experiencing depressed revenue and earnings. In this structure, a percentage of the sale price is pegged on the ongoing performance of the company. The seller is willing to share some of the buyer’s risk that the economy will improve and business profits will return. By sharing that risk, the seller will be able to increase, over time, the amount of money received from the buyer. This can be a win-win: the seller can receive a higher price and the buyer can be assured that the seller will “stick around” to assist in making the business profitable again.

Performance-based earn-outs differ from business to business: they can be based on revenue, gross, net, customer retention, etc. A key element for their success lies in the relationship between buyer and seller: securing the best buyer and nurturing the buyer/seller relationship during the negotiation period is pivotal to the deal’s future success.

Banks look favorably at deals that include some seller financing: it demonstrates the seller’s faith in the buyer and, even more so, in the future of the company.

C. G. Reicher Associates would be pleased to discuss with you the timing of your exit strategy and how current economics may or may not influence the value of your business.