It's a Buyer's Market for Small Business

Written by George Waldon: From Arkansas Business

When it comes to selling a small business these days, it's a buyer's market.

"For 2011 nationally, we saw an increase in the number of transactions and median price but a decrease in valuation of multiples," said Mike Handelsman, group general manager of BizBuySell.com of San Francisco and BizQuest.com of Los Angeles.

"It's an indication that sellers are lowering their prices in order to sell their business."

The average revenue multiple for small businesses sold in 2011 was 0.6, down 8.8 percent vs. 2010, and the average cash flow multiple was 2.36, down 8.2 percent.

In addition to national statistics, BizBuySell.com tracks activity in 67 markets. However, none of those markets are in Arkansas.

The company did track 52 closed transactions in Arkansas in 2011 on ventures with a median gross income of $413,000. That compares with 51 completed sales of small businesses with median gross income of $522,000 during 2010.

BizBuySell.com lists 220 businesses for sale in Arkansas. The offerings range from an independent chain of seven restaurants in central Arkansas with an asking price of $4.4 million to a leased specialty foods store in northwest Arkansas with an asking price of $29,000.

Demographics are helping provide impetus for both buyers and sellers, according to Wayne Lee, principal at National Business Brokerage of Sherwood.

"There's kind of a confluence of factors going on right now: Baby boomers looking to sell, and baby boomers who have been working for a big company looking to retire and purchase their own business because they're not ready to retire yet," Lee said.

"Given the influx of baby boomers, there's a good market for buyers or sellers. Of course, the economic situation negatively affects everything."

His No. 1 tip to small-business owners contemplating a sale: Don't attempt to sell without a business valuation.

"The reason sellers don't want to do that is it costs money," Lee said.

However, the $1,000 to $1,500 cost for valuing a small business will help establish a sound asking price that will help produce a better selling price.

"They're probably converting their largest asset to cash, and they better do it right," Lee said. "They need to understand there's a difference between selling a home and selling a business."

Lee adheres to a stringent screening process before taking on clients that includes providing them with a realistic assessment of what they have and where they're going.

"I want to consult with a client for a while before we take them on," he said. "I want everyone to be on the same page. There isn't a client in the world who isn't in love with their business. Our job is to educate them that others don't see that baby as beautiful as they do.

"I don't want every client who wants to sell a business. If the client isn't willing to pursue a high-quality transaction, we don't have time to spend with them."

Making the Numbers Work

"If a business is priced right and profitable, it will sell," said Erik de Renouard, principle broker at Sunbelt of Little Rock. "The market is improving. We noticed a downtick last year, but it started picking up in the fourth quarter."

He echoes what others point to as the driving force behind sales activity among small business owners.

"By far and large, it's the baby boomers and it's retirement," de Renouard said. "That's the No. 1 thing I hear. For some, health reasons are coming into play. Another reason is that people want to diversify and get into something new and different. But far out front is baby boomers wanting to retire."

His leading tip to sellers is a fundamental one: Keep good financial records.

"That's by far and away the most important thing," de Renouard said. "It's good to have a business that makes a lot of money, but you have to have the records to prove it. We won't list a company if there aren't good financial records."

Providing three consecutive years of recent financials is considered the norm. If small-business owners are serious about selling these days, it's almost a prerequisite they include seller financing as part of the package.

"Owner financing is often key," said Kris Muradian, president of Little Rock's Muradian Business Opportunities. "Banks are harder to deal with, and it makes the buyer feel more comfortable."

Muradian, who has specialized in buying and selling small businesses for 33 years, is very optimistic about where the market is headed.

"If we don't sell the business, we don't make any money," he said. "2010 was really a good year. This year, so far, is good. One reason is some of the deals we were working last year are coming to fruition now."

His word of advice to his would-be clients: Be Honest.

"Good or bad, tell me," Muradian said. "It's much easier to sell the business with accurate information. Buyers are smart. They will dig into it and discover the truth.

"I reject at least one business a week because something is fishy and just doesn't look good, and a bank won't touch it."

Tom Redican, owner and principle broker of Little Rock's Central Arkansas Business Brokers Inc., has more of a glass is half-empty perspective on the market.

"You ever hear how noisy it is in a casket?" he said with a laugh. "It is quieter than it has been in recent years. 2007 was the last really, really good year.

"Buyers and sellers are really difficult to find because they're waiting on the chaos to end with the topsy-turvey economy. There are buyers out there, but more of them are on the larger end, buyers of $1 million-plus businesses."

Some sectors in Arkansas remain more attractive than others, Redican said.

"Service businesses are doing fine," he said. "Retail? Not so good."

Nationally, the breakdown of 2011 sales of small business by sector is divided among service, 38 percent; retail-other, 29 percent; retail-restaurant, 23 percent; other, 6 percent; and manufacturing, 4 percent.