(Editor’s note: John Ovrom is founder and CEO of Exit and Answers, a social community for entrepreneurs looking to sell their company. He submitted this story to VentureBeat.)
As entrepreneurs evaluate their goals and objectives for the upcoming year, many may decide that it’s time to execute their exit strategy and sell their business. While the process is never an easy one, they’re going to have a slightly easier time of it than those who put up the ‘for sale’ sign in 2009.
I expect business valuations, which took a hit over the last couple of years, to level out or get a little better next year. A business is often valued at a specific multiplier of the company’s annual gross revenue and/or the gross profit. Over the last couple of years this trend has been going down, so the business values have followed.
Multipliers have fallen 25- to 50 percent over the past two years ago in many industries and I think they’ve finally hit bottom. This will prove a catalyst for the many people who have been watching and waiting for the economy to bottom out.
Most business owners that I’ve spoken with expect their revenues to be flat or better in 2010. That’s notably different than last year’s sentiment – and it’s another indicator the bottom may be near. As revenue starts to improve and the deep cuts entrepreneurs have made start to show profit, buyers will be forced off of the sidelines.
The trick is going to be financing. Bankers I’ve spoken with expect to see more lending from their institutions in 2010. They’ll have to keep it in their portfolio, though, as the secondary market is still very dry. As a result, they may be loaning more, but it won’t be close to the levels of recent years – meaning it will be slightly better for institutional financing, but still tough.
Mergers and acquisitions will come into play next year as the successful companies start to expand and take advantage of the relatively cheap open market. They are still very protective of their cash, but if you are willing to take stock or seller financing in order to make the deal happen, there are some businesses that are once again fishing for deals. Look for this area as one of the chief growth areas of 2010.
Similarly, the franchise business market looks set to expand. There are a lot of highly qualified people without jobs that are thinking about starting a business – and buying an existing business or franchise has a much higher success rate than opening one from scratch. This is where they are looking. Note that while activity in this area has picked up, people are looking hard for deals. It’s still very much a buyer’s market.
While the market for selling your business in 2010 will be better, it won’t be exponentially so. We’re still several years away from the glory days of 2007.
The key to selling your business will be showing that it is thriving and has excess operational cash flow that can pay for the financing. In the meantime, continue to work on making your start-up more valuable – and be ready to jump when the right offer comes in.
Original photo by TheTruthAbout… via Flickr