INSIDE SMALL BUSINESS

Tough conditions pushing some to want to sell out

By Delroy Alexander,  Chicago Tribune Staff Reporter

Chicago, January 10, 2002.  Mergers and acquisitions ground to a halt late last year because of the terrorist attacks and a softening economy, but many small- and medium-size firms again are looking to consolidate.

The tough operating conditions of the last few months have forced business owners to concentrate on a number of issues, including whether they really want to fight through another recession, according to Richard Jackim, president of Schaumburg-based M&A intermediary Chapman Associates.

"Recent events have made business owners focus on what is important to them," according to Jackim. "In most cases, that means they are looking at improving their quality of life."

Most owners are not market timers looking to maximize the sale price, either, reckons the boss of the firm that advises sellers with revenues of between $5 million and $60 million, a niche that avoids competition with bigger investment banks and specialists in selling the smallest firms.

Jackim said that, notwithstanding current conditions, the majority of his clients usually cite personal reasons, such as a divorce, a death in the family or a dispute with partners, for why they are selling their firms.

And when they do decide to sell, bigger firms appear to carry more weight with buyers, according to a new study by the firm of 415 private transactions completed between 1996 and 1999.

The median selling multiple for companies with revenues of less than $10 million was 4.9, according to the Chapman study. Those with revenues of more than $50 million had a median selling multiple of 6.7. "That suggests that buyers are willing to pay a 36 percent premium for larger companies," added the report.

Bigger firms typically sell for higher multiples because they usually have stronger market positions, a broader-based professional management team in place, a more diversified customer base and better access to capital.

Sellers are also more realistic and willing to negotiate on price. Although the fundamental process of valuing a firm has not changed, the pool of credit for potential buyers has shrunk considerably in recent months, as bankers become more risk averse.

Just 18 months ago potential purchasers had to come up with only 20 percent of the equity required to buy a business, with the bank putting up the rest. "Banks are asking for between 30 and 40 percent equity from a buyer now," said Jackim.

Owners are more willing to share the burden taken on by a potential buyer, he adds, by helping meet some of the equity demands of banks through providing some level of seller financing or leaving some of their own equity in the firm.

Copyright © 2002, Chicago Tribune