Small Firm M&A Set to Pick Up in 2011

NEW YORK ( TheStreet) -- The current economic reboot has industry experts expecting this to be a good year for small-firm mergers and acquisitions.

People who held off on selling their businesses over the past few years are expected to come back to the market to take advantage of improved economic conditions and an increase in buyers.

"Based on our conversations with business sellers, brokers and buyers, we believe that stable businesses with appropriate price expectations will likely receive quality offers from prospective buyers if they come on the market during the next 12 months," said Mike Handelsman, group general manager of BizBuySell.com and its affiliates, in a February survey conducted by the online marketplace for businesses for sale.

The tough financing environment remains the most common factor preventing business transactions from closing, followed by continued high seller expectations, according to the survey.

Ken Ducey, President of Fairfield Capital, which provides strategic advisory services to small and midsized firms, spoke with TheStreet this week on the state of small-firm M&A.

Is now a good time to sell a business?
Ducey: On both sides you've got a lot of desire. On the buyer side there are a number of people out there with money, whether it is corporations, private equity or other types of investors -- obviously strategic investors. On the seller side you certainly have a lot of companies that thought about getting out two or three years ago but, due to the economic conditions, held off, as well as business owners who had planned on selling now. So there is certainly a lot of supply out there.

The issue really comes to the valuation and who is going to bend first. There are a lot of sellers out there who say, "I'm not going to sell right now because I know I'm not going to get the right valuation." There is no way to time the market. It's a much more fluid market. Business sales take a long time. There is no such thing as really apples-to-apples in companies.

Think about what's in it for you. If I'm a business owner and I own 80% of a company and I know I need X to retire, am I going to get X? If I can get X and I don't want to continue with the company, well then, yes, it's a good time to sell. If I can't get X, well then, I better start looking at the company and figuring out ways to make it better and more valuable. Those factors are much more important than what's going on in the overall M&A place.

What are some of the hot industries?
Ducey: Obviously you see some of the more sexy stories out there with the Internet companies and energy companies and things of that nature, but beneath that a lot of buyers are going after the more "boring" companies. Manufacturing is making resurgence. We see a lot of activity there, as well as high valuations. And when I say manufacturing, I'm talking about some really old-time making-bolts-or-nuts type of companies. That's sort of fascinating. The other thing we're finding is more commodity-type companies that are becoming hot again.

What are some suggestions for small-business owners to ensure they get maximum valuation for their companies?

The earlier you start the better.

Ducey: It's almost never too early to start planning it, because there are certain things you could do that just simply take time. Even if you're not thinking about it but it's something that's even three, four or five years out, you should at least sit down and start thinking about it and start thinking about what needs to be put in place.

Surround yourself with the right team.

Ducey: You really need an M&A adviser, the right attorney and the right accountant to put together the whole package. That transaction never ends at that table -- there is typically an employment contract, typically some sort of earn-out. You want to make sure you're protected.

Take a hard look at your own business as an outsider would.

Ducey: Focus on some of the negative aspects. Maybe there is one aspect in your company that is really holding your valuation down. Sometimes those things take time to fix, but sometimes they're rather simple fixes.
If a business posted a loss in any given year, particularly during the recession, is there a way to improve how that looks to a potential buyer?

Ducey: The longer you can prove that your revenues are back to where they were or as close to where earnings were in '06-'07, the better. If you're not there yet ... you may have to do some sort of earn-out where the value of your company will only be determined, let's say, three to four years after the purchase.

Most small-business owners are not used to reading complex financial contracts. What's important to know?
Ducey: Most people only go through this once, so make sure you have an experienced team that will go through it with you. You'd be surprised how even one tax clause could make a tremendous difference to the value you're going to receive from selling your company. From a legal perspective, as much as you say "This contract or note is going to be secured by the assets of this business," do you really want your business back after this person has been running it into the ground the last 18 months? No. Make sure that your interests are aligned with the interests of the buyer.

To contact the writer of this article, click here: Laurie Kulikowski.

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