For the last decade, buyers have been willing to pay robust prices to acquire small businesses, compared to historical averages, and we’ve seen many sellers considering multiple bids for their companies. As the difficulties of the last several years have eased, Q4 2021 sales activity beat pre-pandemic levels, and the pace is expected to pick up in 2022 and beyond.
The time is right to sell well-performing businesses
In fact, for many businesses, now is a great time to sell. For one thing, the stock market’s performance in 2021 produced a lot of liquidity. For another, there’s significant appetite from those who want to invest in or purchase businesses. In 2021, business sale prices rose by 16% compared to 2020 , according to BizBuySell, which tracks and analyzes business sales and sentiment.
Changes in the workforce are another essential driver. The recent push to remote or hybrid work led more people to uncover a desire to make changes in their lives. Some are leaving corporate jobs and, instead of taking a new position, buying a business in a smaller town or otherwise pursuing a goal of entrepreneurship. More than 5 million people applied for new business licenses in 2021 — the highest number the U.S. Census Bureau has ever recorded. Importantly, financing is also readily available.
How to prepare your business for sale
If these points have whetted your appetite to sell your business now or in the near future, here are four things to consider:
1. Pre-assess your business valuation. Our bankers have noticed that business valuation today is distinctly industry-dependent, based on whether and how much recent economic turmoil impacted them. You can get a sense of what the market might bear by reviewing BizBuySell Business-for-Sale Trends and Transaction Activity by region and sector. You can also run a back-of-the-napkin calculation: BizBuySell cites the average sales price for businesses as 2.28 times seller’s discretionary earnings (SDE). SDE is net profit plus one owner’s salary plus add-back items—documented and reasonable expenses such as company contributions to health insurance and retirement plans.
2. Tell the right story in your marketing. A strong marketing package can demonstrate your competitive performance from step one. Most sellers find that the right broker can represent you appropriately through the way they tell the story and present information. Ideally, potential buyers won’t need to search for information to make their decision. Instead, they can review your sales package, see immediately that the deal makes sense, and share that information with their lenders to secure financing.
3. Keep your banker in the loop. Your banker may be involved in a business acquisition or sale, particularly if you’re selling debt along with the business. If you have credit facilities, you’ll likely want to discuss with your banker how they will be treated. Will the buyer assume the debt? Or will it be paid off at closing? Finally, your banker can help assure any liens associated with credit facilities are released, if necessary.
4. Consider bank financing if it’s available. Depending on your industry and the buyer’s experience and equity, banks are increasingly open to financing business sales. For small business transactions, your banker can talk with you about whether products such as SBA 7(a) loans are the right choice. While these loans require collateral, companies may pledge tangible assets as collateral to take advantage of the 7(a)’s longer terms and lower interest rates. That’s all to say that there are options out there, and it’s worth speaking with your banker about them.
Throughout the process of selling a business, we encourage you to think of your banker as a trusted advisor, along with your broker, attorney and accountant. Your business banker should know you and be familiar with your goals and opportunities, and likely will have a sense of business valuation and market appetite, along with a deep industry focus that can serve you well.
To learn more about how our bank can support you through a business sale, contact your Western Alliance Bank relationship manager.