If you have a profitable business in a growing industry, now might be a great time to sell.
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From COVID fatigue to Zoom fatigue, Americans have been working to overcome all types and degrees of exhaustion throughout the pandemic.For some small business owners, the exhaustion of operating a business during an economic crisis — filled with shutdowns, capacity fluctuations, and workforce shortages — has maybe even motivated them to investigate selling their company.
“Some people are just over it,” said Mike Bosma, managing principal at Keystone CPAs in Reno. “You talk about Zoom fatigue? There’s business fatigue. It seemed like at the onset of the COVID shutdown, every decision you were making seemed like it was life ending. And when you’re in that for such a long, protracted time, you’re just tired.”
As a result, the pace of retirement has accelerated drastically in the past year. According to data from the Pew Research Center, about 28.6 million Baby Boomers (born between 1946 and 1964) retired in the third quarter of 2020. That’s 3.2 million more than the 25.4 million Boomers who retired in the same quarter of 2019.
Mike Bosma
ALL ABOUT CASH FLOW
For sellers — from Boomers ready to retire to Gen Xers seeking a new lot in life — the first thing they should do is get their business valued, Guthrie said.To do so, she recommends entrepreneurs get a broker’s opinion of value (BOV), which is generally based on cash flow. While some have seen a boost in business during the pandemic, many saw their cash flow slow to a trickle in 2020 and are still waiting for revenue to return to pre-pandemic levels.
“If you had really terrible cash flow during COVID, you may want to consider hanging around for 2021 and getting a bump from your rebound,” Guthrie said. “If you can show that your revenue and seller’s discretionary earnings are rebounding to 2019 levels, they can pretty much discount 2020 in the calculations. In the small business market, most people are buying cash flow; they want to give you a little bit of money, so they can make a living.”
Kathryn Guthrie
“It’s not as much now, but in the middle of the pandemic, you couldn’t give a bar away,” Bosma said. “And depending on the type of restaurant, those values went down significantly. And certain doctors’ practices will probably never recover. If you did elective surgeries, in this season, you were on the beach, there was nothing to do.”
Added Guthrie: “Buyers are really looking for what they call COVID-proof businesses. But, really, it’s businesses that showed some resiliency and some flexibility.”
PPP EFFECT
And for such business owners in a strong position to sell, one of the first things they should do, if they haven’t already, is apply for PPP loan forgiveness, said Guthrie.
While not every company in Nevada got one, more than 124,000 businesses in the Silver State received the SBA-backed loan to the tune of $6.9 billion, according to FederalPay.org.
“Once it’s forgiven, it’s like it was never there,” Guthrie said. “If they can’t get it forgiven, then we recommend that they get it paid off as quickly as possible. If they don’t, it’s a lien on their business, which can delay escrow, if they have a buyer. Or it could lead to an impound of funds, either to pay off the loan or to hold while the forgiveness is pending.
“So, if I have $100,000 (in PPP) but I’m in the middle of the forgiveness process and it’s not forgiven yet, they’ll ask to hold $100,000 out of the sale. So, you get your money slower.”
NO SUDDEN MOVES
For an entrepreneur eager to buy an established business and grow it, one of the biggest mistakes they might immediately make is, well, immediately make changes, Bosma said.
“Some buyers (who have) never operated this business a day in their life think they know more on day one than the seller did who was running the thing for 30 years,” Bosma said. “Why did you buy it if you’re going to change it? I tell people to wait a year before you change anything.”
Not only that, buyers should want to have the seller on their team, said Bosma, adding: “And the only way to do that is to make them feel valued and honored in what they did to get their business to where it is.”
Guthrie also warns buyers not to get emotionally involved. Those emotions, she said, can work against you in the negotiation process.
“If I were selling a coffee roaster and you were passionate about coffee and you love this brand, you might not negotiate well because you’re emotionally-invested in the sale,” she said. “Don’t emotionally invest in the business until it’s yours.”EDITOR’S NOTE: This story has been updated to correctly report that Mike Bosma is managing principal at Keystone CPAs. The original story incorrectly identified Bosma as having an additional role as a business broker with M&A Business Advisors in Reno. The NNBW apologizes for the error.
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