According to Slee’s research, the United States economy experiences a recession (or other economic downturn) during the first three or so years of every decade.  The capital supply to the private markets becomes restricted, primarily because lending is restricted, which reduces the leverage a buyer can achieve and lowers valuations as well as limiting access to working and investment capital.

This begins to transition around the fourth year as companies improve profitability which leads into a period of free-flowing capital into the private market.  Humans are creatures of habit, so we quickly forget the recession we recently survived and continue to spend and invest until we are over leveraged and over invested.  At this point, parts of the economy begin to feel the strain and the economy as a whole is affected by the end of the ten year period.

Why will such a cycle be expected to continue?  Because the nature of people, namely, the private business owners, bankers, investors, and politicians in America, is to be overly optimistic in the good times and overly pessimistic in the bad times.  We also take a predictable amount of time to adjust to changing conditions and we can be counted on to react in certain ways.

Today, the catalyst for our recession was sub-prime mortgages followed by complete financial system meltdown, bankruptcies, and major fiscal policy changes.  Impending commercial mortgage uncertainty will help us to remain in a deal recession for the next several years.  Business values will remain flat or fall further as we struggle to adjust.  But adjust we will (or go bankrupt) and the survivors will profit again.

In my last post on business value, I mentioned that you can expect to achieve the highest return when selling your business at the right market timing.  If the transfer cycle holds, the best time to buy a business will be any time from now through 2013 or so.  The best time to sell a business will be toward the end of the prime selling time, or roughly 2016 – 2018.  Obviously, businesses will continue to be bought and sold every day, but a savvy business owner will look to exploit this cycle to his or her advantage.

There are three factors that affect the value of your business the most: Timing, Timing, and Timing.  Assuming you’ve got a profitable enterprise with value outside of your own day-to-day involvement in the operations, your decision to sell the business will be most highly rewarded when three timings all line up perfectly.

1. Personal Timing.

   What’s your Plan B?  What is it that you want to do next?  If you realize you won’t have anything to do after you sell your business, then you’ll be reluctant to give it up until you have to.  When you do have something to do, say, another investment or business or even taking a trip around the world, then you will be much more inclined to do what is necessary to sell your business.

2. Business Timing.

   Ok, so you’re ready to sell, but is your business ready to be sold?  If you sit down with an advisor because you’d like to cash out in the next six months and they find that major changes need to be made to your operations or your financials then you either have to wait or understand that the buyer will discount their offer as a result.  Always be ready to sell!  Look at your business today and make the changes now because someday, you will transition your business.  You never know when someday will come, because of…

3. Market Timing.

   This is the one that is completely out of your control.  It is also the reason why your business should always be ready for transition and you should always have a Plan B.  When the market is ready, you must be ready.  It’s not always clear when the market will be primed to provide you with the highest return although there is a general cycle in the United States economy, which we’ll talk about more in the next post.

1. Assemble a team to help you sell
2. Get your family out of the business
3. Report all income for at least three years
4. When trust is involved in a decision, it’s always better to be trustworthy
5. Begin to document everything

Please check out the full article for all the details.

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Etienne Hardre is a Senior Associate with BiggsKofford, P.C. specializing in helping entrepreneurs buy, grow, and sell businesses.

Here are 10 reasons to engage a business intermediary:

1. In-depth knowledge of the tax consequences. There are many ways to sell your business and each structure can have very different tax consequences to you and to the buyer.  Knowing what the tax man will require of you under each scenario is critical to your negotiations and to your ability to pay all your obligations and still have cash left over.
2. Knowledge of your business and its industry. If included in the preparation process prior to the actual sale, a business intermediary can provide insight into your industry and help you find ways to maximize the value of your business.  Most value maximizing strategies will take time to implement.  Therefore, it is important to communicate with all of the experts you plan to use during the transaction as early as possible.
3. Awareness of market conditions. An M&A professional is constantly involved in the market and learns when the timing is right to buy or sell a business in a variety of industries and to a variety of buyers.  Sometimes private equity groups are extremely active while other times corporate strategic acquisitions are more popular.  As the economy surges in certain areas, some industries will benefit from higher valuations and more M&A activity.  Other times, it will be wisest to stick it out and wait to sell your business if at all possible.
4. Marketing your business for sale. Marketing a business for sale involves preparation, analysis, and a unique mix of technical and creative skills.  Unfortunately, it is nothing at all like marketing your goods or services.
5. Exposure to create competition for your business. You will receive the maximum value for your business when several buyers are competing with each other to acquire your company.  A good business intermediary will know who the players are in your market and will be able to craft this competitive environment through research, skillful timing of marketing materials, and deft negotiation.
6. Confidentiality. Many times, even the news that you might be interested in selling your business can cause ripple effects that are far reaching and uncertain.  How will your key employees react?  What will your key customers think?  A professional M&A advisor can be engaged in a confidential manner and control who receives information about your interest in selling and with whom they can communicate that information.
7. Removal of distractions. Selling your business will not happen overnight and you will be needed to keep your business profitable and growing.  If you are spending too much time mired in the details of selling your business you will not be effective at managing it and vice versa.  Having a dedicated advisor to work on selling your business will free up your time and energy to continue to run it.
8. Emotional buffer. Most of the time, buyers and sellers of businesses will not agree on everything.  When that happens, an emotional buffer in the form of a designated negotiator can be extremely helpful to keeping the deal on track.  In addition, since the M&A advisor has less “skin in the game”, he or she can be more objective and help you to make decisions based on the facts and not in the heat of the moment.
9. Facilitation of the process. The process of selling a business is incredibly complex and involves many moving parts.  A qualified business intermediary can successfully bring together attorneys, bankers, accountants, insurance agents, key customers, suppliers, employees, buyers, sellers, and everyone else who may be a stakeholder to make sure their needs are met and the process can move forward.  Not having this point of contact generally means the task is up to you.
10. Negotiation ability. Almost anything can be negotiated during a business sale.  How much working capital will you leave in the business?  Will this be a stock sale or an asset sale?  Will the buyer assume any debt?  Which ones?  What is the final closing price?  How will the closing price be allocated among the assets?  The best M&A professionals are tirelessly working to produce the best possible outcome for you, knowing your goals and needs.  They have the skills to negotiate in your favor.

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Etienne Hardre is a Senior Associate with BiggsKofford, P.C. specializing in helping entrepreneurs buy, grow, and sell businesses.