Mergers & Acquisitions Advisory

A Neumann & Associates, LLC

February 10, 2019

The Worst Time To Sell A Privately Held Business

By Jeremy Albelda

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“When is the best time for me to sell my company?’ – a question we have heard time and time again from business owners. “says Achim Neumann, President, A Neumann & Associates LLC, a New Jersey based Mergers & Acquisitions advisory and Business Brokerage firm, “And the question becomes even more important in the current economic cycle.”

After many years of excellent growth, business owners start questioning, if an economy supported by a favorable tax environment, low interest rates and significant available equity funding will continue to support growth in their companies, plus provide a good environment to sell their business in the near future – all of this with the background that most economic indicators continue to predict growth, albeit at a lower rate, with seemingly little support for an imminent recession.s

Furthermore, with many business owners approaching retirement within the demographic “baby boomer” shift, they are asking themselves this question more so with respect to lifestyle decisions than to financial concerns.

Setting aside lifestyle considerations for a minute, selling a company always starts with a proper initial company business valuation regardless of the economic cycle.   As we have seen so often on the television program, Shark Tank, a correctly valued investment opportunity will attract buyers, an overpriced proposition will result in little interest.

Such business valuations, conducted by accredited, national business valuation firms, usually view a seven-year financial period for formulating a value – three years of projections, the current year-to-date with comparison to the previous year and the past three years. Historic financial data is based on tax returns adjusted for discretionary owner expenses and one-time events in order to derive the true cash flow generating capabilities of the company. Said financial review is typically supported by a review of a company’s operation and market position.

Challenges come into play when there is little consistency in this seven-year review period, as investors always prefer to see stable environments and consistent trends.  Most often, there is the ’hockey stick’ scenario: a declining past trend of sales or EBITDA (Earnings before interest, taxes, depreciation, and amortization), is all of the sudden met with vastly optimistic projections for the future of the business’ performance.

How does the micro-economic effect of poor forecasting or the macro economic impact of the economy as a whole impact the opportunities to sell a company?

Focusing on the macro economic impact and the right timing of selling a company, let us assume a company has had consistent growth in the past five years in top and bottom line. Furthermore, assuming a 2019 economic decline, the company’s sales are predicted to decline by 15% to 25%.

For a contemplated valuation to be performed in 2019, such sales / EBITDA decline would land within in the previously mentioned valuation review period. The financials would show continued growth from 2016 to 2018, a decline in 2019, and reduced forecasts for 2020 to 2022. Thus, investors would immediately attempt to shift any perceived future risks to sellers, for example, in the form of a large earn-out for future performance.  In other words, such ‘dip’ has an immediate impact on buyer expectations for the future.

As we have seen quite often in the 2008 recession, some business owners might suggest to wait a year or two hoping for a rebound.

However, within the previously stated seven-year valuation review period, even if a business would only show a ‘dip’ in 2019 with continued growth there after, the historic cash flow 2018 to 2020 would still be ‘visible’ as a trend line in a 2021 valuation and thus, the business would not be ready for a business valuation before 2022 without showing any inconsistent trends.

Consequently, from a pure business valuation point of view, “waiting just one more year” truly translates into waiting three more years and, adding an additional year to actually sell a business, the business owner’s retirement plans were really delayed by 4 years – for a transaction in the spring of 2023. Needless to say, the underlying significant assumptions that there is no prolonged recession, the company will continue to perform without further ‘dips’ and there will be no health issues by ownership are strong assumptions, indeed!

In sum, any business owner contemplating a business sale at any time within the next three years, should not wait too long but rather take advantage of the current economic climate. A potential economic decline can quickly translate into a five-year delay for obtaining maximum value.

About A Neumann & Associates, LLC

A Neumann & Associates, LLC is a professional mergers & acquisitions and business brokerage firm having assisted business owners and buyers in the business valuation and business transfer process through its affiliations for the past 30 years. With an A+ Better Business Bureau rating, the company has senior trusted professionals with a deep knowledge based in multiple field offices along the East Coast and has performed hundreds of business valuations in its history. The firm’s competitive transaction fees are based on successfully completing transactions. For more information, please contact A Neumann & Associates at 732-872-6777 or info@neumannassociates.com

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Client Testimonials

“I recently contacted A. Neumann and Associates about getting a valuation of my business done. I spoke with Marc, who explained the process in detail. After meeting with Marc in order to get a clear understanding of my business, and what I was hoping to accomplish. His patience in answering all my questions and his knowledge of the proper way to market my business gave me great confidence that this is the firm I will be using to sell my business for max value. Working with Marc at A Neumann & Associates was very easy and professional. I did not know all that was going to be involved in selling my business but they helped me through the process. What I thought was going to be a just another one of those pushy sales companies was just the opposite. Polite, knowledgeable, and a pleasure to talk to and deal with. I highly recommend this firm to anybody who wants to sell now or down the road. Marc not only knows his stuff, but actually is a real nice guy.”

Double Diamond

“Used A Neumann & Associates to sale my business. could not imagine having done it with out the patience and experience Gary provided. Thanks Gary,”

Dennis Frazier

“Working with Marc and his company was a pleasure. What I thought was going to be a just another one of those pushy sales companies was just the opposite. Polite, knowledgeable, and a pleasure to talk to and deal with. Marc handled most of the interaction and he has one of the greatest demeanors. Again, it was a pleasure working with him and his firm.”

Douglas DiCeglio

“I recently completed an acquisition using A Neumann & Associates. Tony Valentino was very helpful and accessible during the entire process. They do a thorough job vetting both parties and got us to the finish line.”

Srini Mudambi

“Claus out of Florida helped us with the sale of our business. We had never done anything like this and him and his team walked us through the process from start to finish. We had some challenges through the process and Claus continued to show up even in the difficult conversations.”

Colby Harris, Co-Owner, Del Mar Designs

“Claus Madsen thoroughly helped us with selling our company. From the 1st introductory meeting explaining to us what was possible, to providing us with resources to assist with the sale. Claus was invaluable throughout the whole sales process. Claus was with us every step of the journey and always made himself available for any questions or issues that came up along the way. If you are interested in selling your business, I encourage you to reach out to Claus and the ANA team so that they can let you know what’s achievable. These guys will make it happen!”

Ron Harris, Co-Owner and Vice President, Del Mar Designs

“A Neumann & Associates is the only business broker I would use or consult with. They have assisted with 3 business sales over the past 15 years with me. They are honest and sincere and have always performed better than my expectations. They are the only one i would use for the sales of my businesses.”

James Belanger, Business Owner

“I wanted to take a second to commend the exemplary customer service from both you [Karin Neumann] and Mr. Valentino. It’s both a rarity in the industry, and very much appreciated.”

Andrew G., Investor

“We worked with Neumann & Associates to investigate the purchase of a research company in 2010 and found Achim to be capable, forthright and realistic. His depth of experience enabled us to fully understand our options, offering creative options that might enable the acquisition. While we didn’t acquire that particular company at that time, we know exactly who to call whenever we’re looking to buy or sell a business.”

Daniel Coates, Buyer

“Purchasing a business through this firm was a pleasure. Gary was very professional and transparent throughout the entire process. I look forward to working with A Neumann & Associates in the future.”

William Klemens, Buyer
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Contact A Neumann & Associates, LLC

If you are considering selling your business, please contact us to learn more about our comprehensive service spectrum. Our experienced professionals will answer all your questions about selling a privately held business in complete confidentiality. Please fill out our contact form, or call us at 732-872-6777. We will contact you directly and will never identify ourselves to your employees.

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