The Perfect Storm - Is Now the Ideal Time to Sell?

Most people are familiar with the "Perfect Storm" - probably because they read the Sebastian Junger book or saw the movie. The Perfect Storm refers to the unique combination of atmospheric conditions that led to the massive storm that claimed the fishing boat Andrea Gail described in Junger's book. I read the book while I was out to sea for a month with the US Navy. Despite the fact that the ship I was on was quite a bit larger than a fishing boat, it was somewhat disconcerting reading about that storm while at sea!

Today we are seeing some signs of a different type of "Perfect Storm" - a combination of economic factors that together make this a great time to sell a business. First, interest rates are extremely low. The Fed has recently stopped raising their short-term Fed Funds target rate, but how long short (and long) term rates will remain this low is anybody's guess. Second, the long term capital gains tax rate is a relatively low 15%. I would bet that this will be raised in the near future depending on the results of the 2008 Presidential election - perhaps even sooner. Finally, there is a lot of undeployed cash out there in companies and investment funds looking to go to work. Investors want better returns than Savings Account returns. Acquisitions are a good way to put this money to work. Like the interest rates and tax rates, the well of money will dry up at some point too - especially after a few bad acquisitions by a few too many acquirers.

Together with this "Perfect Storm" is the pending retirements of the baby boomer generation. According to consulting firm ROCG, between 2 and 3 million small to medium-sized businesses will be tranferred to new ownership as the baby boomer generation reaches their 60s. This event could create an environment where there are significantly more sellers than there are buyers. (By the way, if you are a business owner you can receive a free report on business owner transition plans by taking a survey at the following address: www.business-transition.com/survey. Your code is A5.)

I don't know how long the "Perfect Storm" conditions will last, and I don't know exactly what is going to happen when the Baby Boomers start retiring. But at the risk of sounding self serving, I do believe that now is a good time to sell a business.

P.S. Link to a good article related to above: http://www.bizquest.com/resource/private_equity_baby_boomers_soon_will_be_driving_-203.html

Value = Increased Cash Flow / Risk

If you took an Electrical Engineering course in college, you probably remember (vaguely!) the voltage formula V = IR. Well, a good basic formula when thinking about increasing value in your company is V = I/R. V is value of course. I stands for "Increased Cash Flow" and R is "Risk". Since Risk is the denominator in our formula, decreasing Risk increases Value. Let's take a quick look at each of these elements.

When thinking about increasing cash flow the first thought that comes to mind is to increase sales. But be careful you don’t go after low- or no-margin work in an effort to simply increase volume. If your gross margin dips below the industry average you will hurt your company’s value. Also – watch your expenditures. Clean up your P&L and eliminate any unnecessary expenses. The most likely valuation of a profitable private company involves the capitalization of cash flow; so every dollar saved on your P&L equates to two to four dollars (or more) of value in your company.

To decrease risk you’ll want to put yourself in the shoes of a potential buyer of your company. What would you want to see if you were looking at your company for the first time? First, you will want to have updated information systems, including up-to- date accounting software such as Quickbooks. Second, make every effort to maintain a diversified customer base. Customer concentrations for any single customer of greater than 25% can drag down value. Finally, make sure that you the owner are as separable from the company as possible. Train managers or key employees and delegate as many duties as you feel comfortable to these employees. A business is difficult to sell if the owner is too embedded in it.

If you do a little each day to increase the cash flow and decrease the risk of your company you will be sure to increase its value over time.

Delta Capital Group

Below is a summary of who we are taken from our website. Please visit us at www.deltacapitalgroup.com for more information including some articles we've written. We focus on selling "smaller" businesses. Companies fitting the "smaller" definition are between about $1m and $20m in annual sales. We feel that business of this general size range have been underserved by quality business intermediaries. Our goal is to bring the same level of service that you'll see in your sophisticated larger M&A firms to smaller companies. We work with a limited number of companies at any one time. So - you and your business will not be a small fish in a big pond at Delta Capital Group.

From our website:
Delta Capital Group is a full service Business Sales and Acquisition firm serving the lower middle market. We use our experience as former business owners, entrepreneurs, and managers to strategically position a company for maximum value.
Delta Capital Group will:
Objectively evaluate your company to determine your readiness to go to market.
Help you determine what aspects of the business are of greatest value to potential acquirers.
Give you concrete advice on how to enhance the value of your business – often in parallel with going to market.
Find the right buyer for your business, with the right price, terms, and structure so you achieve your goals for yourself and your business.