04 Mar The “Triple Whammy Affect” on Listing & Selling Small Businesses (Part 2 of 2)
Today’s posting is a continuation of the Three Whammies outlined in Part 1 of 2
So, recognizing these “Triple Whammy” truths/challenges helps business brokers understand better why it’s perhaps more of a struggle today to find do-able deals than it was pre-recession. These phenomena also help explain why the business brokerage industry has fewer practitioners today than pre-recession.
Most important to those of us who’ve survived these developments, is…what can we do to continue offering our valuable services, and how can we overcome the challenges of finding transactions that are likely to consummate?
Here are a few suggestions that we are following today in our agency. Some of these are repeats of still valid, “tried, tested and proven” techniques, and some are adjustments to old theories that we’ve found to be effective:
- It’s even more important than ever to increase the total number of seller contacts we make, looking for willing and realistic sellers. We simply have to “kiss more frogs to find a prince” than in better economic times. Not only are we continuing our direct mail and telemarketing canvassing, but, we’ve also added multiple email blasts we send to prospective sellers. And, we follow up on the email blasts with multiple phone contact by an agent. Also, we are going back to doing something we haven’t done for years…live, in person networking, by joining and being active in multiple Chambers of Commerce and other business organizations in our metro area.
- We’ve developed more conservative pricing recommendations, especially for businesses that have EBITDA of less than $100,000 annually. We will list these, but, we work hard to price them at 2 times EBITDA or, preferably 1.5 times EBITDA, or less. For businesses with EBITDA of over $100,000, we work hard to inform sellers of the “reality of the market place”, to show them what buyers are likely to offer. We think it’s a dis-service to “tell sellers what they want to hear” about price, just to get a listing. We believe it’s a long term client relations disaster to take listings we can’t sell and/or can’t get financing for.
- We’ve developed an analysis we call “The Prover” that shows the seller of a prospective listing what would happen to a buyer who pays various multiples of the seller’s present EBITDA, including imputing into the analysis the buyer’s likely loan payments, along with the likely cost of goods and operating costs, to determine the Net Cash Benefits (NCB) of ownership of the business, based on present (not future) financials. The Prover identifies what a “long shot” it would be to find a buyer who would over pay for a business that uses an unrealistic multiple. It “proves” what the likely true price is going to be that will (a) excite a buyer, and (b) gain acceptance and support from a buyer’s lender. The Prover shows several different prices for the business, side by side, based on different multiples of the business’ EBITDA on the page, with a standard buyer down payment, and the estimated acquisition loan payments, leaving, in each column, the Net Cash Benefits to the acquirer, after all the business operating costs, and after debt service. Often enough, this “evidence” of logical (and, side by side, illogical) pricing also satisfies realistic-minded, prospective sellers. For those sellers that will not recognize the wisdom of pricing realistically, by at least pricing the listing somewhere near the “real world” multiples, we are less willing to take those listings than we might have been years ago.
- More than ever, we conduct a thorough interview of every buyer to determine not only their “ideal deal”, but also their true financial capabilities, so we are more likely to match them with a business that “fits” their capabilities, not just their interests.
- We are “starting early, quitting late, and working hard and working smart”. We’ve always known that energetic dedication pays off. Today, we are convinced, more than ever, that hard work is vital for survival. And, we are convinced, the better we educate ourselves, by researching and understanding the dynamics in the economy that might affect buyer and seller motivations and decision triggers, the more likely we will be able to provide services that buyers and sellers will want to take advantage of.
- Finally, we work constantly to improve our internal closing ratio’s, by hopefully filling our brokering lives with prospects and projects that have a reasonably high chance to happen beneficially.
Of course, there are exceptions to every point discussed in this article. We don’t pretend to know everything about anything. But, these observations are an accurate reflection of what we are experiencing, and have experienced, in recent years. And, we remain enthused about helping buyers and sellers make deals. We are blessed with being in a profession we love doing every day, challenges and all.
Definition: “Whammy”: Any development, outside our personal efforts, that affects our profession in a challenging way. Note: Discovering one or more solutions to such a development is one of the most rewarding, exciting aspects of practicing our profession.