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The Co$t of Waiting

John Kielich, Managing Director of Kolb+Co. M&A Advisers   email | bio 
LeAnne Foster, Senior Associate for Kolb+Co. M&A Advisers   email
June 2010

Many publications have been indicating hiring is going to increase, and the latest jobs report indeed proved that to be true: As noted in the April 2010 Global M&A Monthly Baird Report, the manufacturing sector is having its fastest expansion since 2004, there are going to be more temporary workers hired and retail stores are showing strong growth. Talk on the street is that things are picking up, getting better, improving.

We hear all this good news, yet there is still hesitation on the part of business owners to take action. The talk on the street does not give business owners 100 percent certainty that things are indeed getting better or provide confirmation that the positive momentum is a permanent economic improvement. It seems that business owners are waiting for concrete evidence before reacting.

Unfortunately, even with technology that can quickly analyze data, there is still a lag in getting timely information. Meaning, when we see the reports that tell us the economy is recovering and moving solidly forward, it will already have been happening for a month or longer. Waiting for this affirmation puts us behind from the start. Therefore, if you are a business owner thinking of making some changes, it would be best to be proactive rather than reactive by aggressively exploring those thoughts now.

Buyers are ready and willing to purchase or invest in good companies. Below are some things to consider for your business.

Right now prospective buyers will listen to the story of a business, empathize with 2009 financial statements, celebrate the improvements the company showed in the first quarter of 2010, and, best of all, buyers will even pay a good price. However, tax laws are poised to change and once business owners understand the reality of the tax increases, the market may become flooded with companies for sale. The current market will provide a seller with a much better price than a flooded market.

However, you need not sell your entire business. There are several ways to share some of your business risk with other investors. Sharing the risk does mean you must share the control as well. Diversifying your investment in this way allows you to use someone else's money to improve your company and take on other opportunities. This seems a bit backwards in good times, but, as many of you cringe at the recent past, this strategy can be extremely advantageous in bad times.

Private equity funds, other individuals or other businesses are all viable options to work with when reallocating some of your risk. One way of sharing some of your risk is a recapitalization wherein an owner takes capital out and reinvests alongside another investor and management. The investor sets up incentive equity for management and provides capital for growth initiatives. There is then a second equity transaction in the future where the original owner can exit the business with management in a position to become majority owner. This gives the company needed capital and the owner the opportunity to reap the benefits the company gets due to the capital input.

This, of course, is all contingent on whether you can live with sharing ownership. Frank discussions are part of the diligence process as sellers and buyers discover if they are a good fit for each other. Many buyers want/need to keep current management in place. Finding the right partner could eliminate the fear of losing your job and those of key employees. Having a dialogue with a potential buyer does not mean you are committed to doing a deal, it means you are exploring the possibility.

There are many more aspects of selling a business we are happy to explore with you.