“Can I Sell My Business After The 2 Worst Years of My Company’s History?”

By Emery Ellinger

These words are echoed over and over again from business owners, “Can I sell my business after the 2 worst years of my company’s history?” Many of these business owners have owned their businesses for 30 years or more, and have reached the age of retirement and need to sell.

It is unfortunate that many business owners need to sell after such a tough recession. The good news is that there are plenty of buyers and plenty of capital on the sidelines. Nevertheless, it is still a buyer’s market. So in order to sell the business, the seller must be willing to sell at market price, or it may be better to wait for better days. The economy is improving. After all we have added 2 million jobs since the recession officially ended, and the stock market has dramatically risen since that time. Yet most of us don’t feel that we are in a robust recovery at this point.

The most important thing is to make sure your company is profitable, and to make sure your company is on a growth path in order to position it for sale. Many times an owner really does not want to wait another year or two to sell. So, in order to maximize its value, the seller needs to develop credible projections that illustrate that his company is growing and will continue to be more profitable as the economy continues to improve.

Why do I need detailed projections?

Realistic projections help a new buyer see the potential as sales continue to grow, and it also helps them with the banks who will be lending them money for the acquisition. A buyer and a bank will dig into the details, and it will be helpful if the projections are believable, and a hindrance if they are pie in the sky projections.

What is an EARN OUT?

A buyer may offer to buy the business based on the current market value of the business, and pay additional monies for the future growth. This additional consideration is sometimes called an “earn out.” The earn out can be a fair way to bridge the gap between the current market valuation of a business that is coming off of its market lows, and the potential value of the business if it continues to improve. The seller gets full value if the earn out is structured correctly, and the buyer pays the fair amount for the business. If the business performs, the buyer pays more; if the business does not perform well, then he has not overpaid. Of course, this leads to pitfalls if the earn out is not properly defined, or the new buyer does not run the business well. Nevertheless, it is a potential way to bridge the gap in the valuation of a business. Good legal advice is needed in structuring this type of an agreement.

Many lawyers will advise you not to have an earn out, and I agree if at all possible. Nevertheless, the job of intermediaries is to get the seller full value, and if the business is growing, an earn out is a method to bridge the gap between what the buyer is willing to pay and the seller is willing to accept.

Earn outs come in many forms. Typical structures are based on percentage of profits, or percentage of sales. So if the business grows the seller may get an additional bonus or earn out after the first year. Earn outs can be multi-year payouts too.

In conclusion, you can sell your business after some tough years, but it is best to have the company rebounding in sales and profits, credible projections in place, and be prepared to discuss an earn out to get full value for your business.

About the Author
Emery Ellinger is Chief Executive Officer of Aberdeen Advisors, Inc. Emery was the # 1 Top Dollar Producer in the Southeast for selling businesses in 2008 for BBN, America’s Largest Network of Business Brokers. Emery advises and sells businesses in the healthcare, manufacturing, business services, distribution and technology industries. For more information visit us on the web www.aberdeenadvisors.com or call 727.369.8204