How to Avoid a Fire Sale
No business owner wants to sell a company on the cheap, liquidate assets or feel he/she has been taken for a ride in a time of crisis. Unfortunately, some of the most successful financial gurus of all time have become the moguls they are by taking advantage of dirt cheap assets during times of financial crisis. Companies sold in recent vintage have only reiterated this point as middle and lower-market multiple valuations have significantly decreased. Learning how to prepare and weather a financial storm is perhaps the best advice for avoiding an unnecessary fire sale of your company. Here are a few additional tips and pointers.
Don’t sell in a down market. Selling your company when market multiples are depressed is depressing. You’re almost guaranteed to obtain a lower value than what your business is actually worth. If you can avoid anything throughout the lifetime of your business, when markets drop, avoid selling your company like the plague. If things are booming, you may want to start thinking about selling.
Pump-up revenues. The best way to avoid selling your businesses for an unusually low multiple is to avoid having a less-than-attractive company. Increasing the sexiness of your company often means increasing the value your busines. Value comes from cash flow. Cash flow comes from revenues and revenues most often come from pumping up the volume of your sales and marketing efforts. Oftentimes this can generally cost less than you think, but will have huge repercussions when it comes time to sell.
Be prepared for disaster. Without a rainy day fund in your business, disasters can ultimately be the nail in the coffin. Many businesses, like many families, are living close to the financial edge. Anything remotely close to a disaster can take an organization from fruitful operation into financial collapse. Having a “rainy day” fund is only half of the equation. Understanding businesses risks and being prepared for them should something deleterious befall your company is an absolute must.
Maintain asset values. As much as possible, you’ll want to maintain the value of your business assets. When the bottom drops out of an entire economy, a natural disaster occurs or an industry is killed through a divine act of creative destruction, your company’s assets will naturally decrease in value. Propping-up values generally means reinvestment, which can be difficult in a down market given the squeeze put on general liquidity and lending. For more information on this see comments on “rainy day fund” above.
Increase profitability of human and financial capital. Squeezing more blood from limited capital is perhaps one of the biggest businesses struggles ever. Doing so to human capital without having decreases in employee morale and/or having workers feel they’re getting bled dry can be a political struggle within any firm. However, “when the going gets tough, the tough get going.” Sometimes bleeding more out of employees and other capital within your firm will help to at least pump-up your business’s value, at least causing you to partly avoid a potential loss.
Sometimes it’s nearly impossible to avoid a fire sale. In a state of nature, recent multiples in the middle market have certainly been down compared to larger deals. However, it doesn’t mean your businesses can be an anomaly as the market begins to make a come back.
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