Were you planning to sell your business in 2020, but the pandemic put that idea on hold? You’re not alone. According to the BizBuySell’s Insight Report, small business transactions dropped almost 40 percent during the second quarter of this year. But take heart, small business sales are bouncing back from April lows.
According to Calhoun Companies, a Minnesota-based brokerage, there are two prevailing types of buyers today. The largest buying group includes those seeking profitable, pandemic resilient businesses. Buyers in the second group are looking for depressed or closed businesses which are selling for much lower prices.
Buyers in both categories still evaluate a for-sale business on commonly accepted financial data and operating information. But today, they also consider any debt a seller has resulting from receipt of pandemic-related government funding programs such as the Paycheck Protection Program, EIDC, SBA Bridge Loans and the SBA Debt Relief program.
“If your business is among those that did not seek out this type of funding, the buy/sell process is pretty much business as usual. If you did receive this assistance, your banker, accountant, attorney and those representing the buyer will be evaluating processes and procedures that relate to pandemic debt,” notes Mark Dunsmoor, senior vice president of Legacy Bank. “In either instance, the seller must still present a clear picture of the business’s operations and financial condition.” In this article series we will focus on the steps to be taken by business sellers or buyers in reviewing and completing a sale.
In most instances, one of the seller’s first steps is to establish the value of the business. The formula for determining value is different for service businesses as compared to manufacturing/distribution companies. Because determining the value of a small business is complicated, sellers might want to consider consulting a professional business broker or accountant that specializes in valuation, rather than going it alone. That said, with a little internet research a seller can identify the commonly accepted formulas that might be used to determine a firm’s value.
However, as noted above, the impact of the pandemic may influence the firm’s attractiveness to the two buyer groups discussed above. For example, according to 3,000 firms surveyed by BizBuySell, 51% closed or suspended operations during the pandemic. Sixteen percent of owners plan to exit their businesses earlier and 20% plan to exit later due to the pandemic. Eighteen percent saw increased sales during the pandemic and among those who experienced reduced demand, 68% expected to return to pre-pandemic levels within a year.
“Conducting a valuation is an excellent opportunity to assess the financial health and potential of your business,” comments Dunsmoor. Along with doing financial legwork, valuing your business also requires you to exercise control over any emotions. “Particularly if this is your first company, or if you run a family-owned and operated business, take care to approach valuation as objectively as possible to come to an accurate number,” adds Dunsmoor.
Mark Dunsmoor is a senior vice president of Legacy Bank with 40 years of banking expertise. Dunsmoor has been recognized as the Greater Pueblo Chamber of Commerce Charles W. Crews Business Leader of the Year and volunteers in many capacities including on the local hospital board.
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