CSU Professors Dawn DeTienne and Kipp Krukowski have published a study looking into what business owners should know about selling in the world of COVID-19.
The COVID-19 pandemic has caused many people to reassess what’s important, and small business owners are no exception.
With many entrepreneurs now considering selling their businesses for reasons, ranging from getting older to health to burnout, two Colorado State University researchers have published a paper in Business Horizons with recommendations about what they should know before and during the process.
“There are a lot of resources about how to start a business, including the information we teach in our classes,” said Dawn DeTienne, a professor of entrepreneurship at the CSU College of Business. “We don’t really talk about, or teach, how to exit those ventures.”
That’s why when the COVID-19 pandemic began in Spring 2020, DeTienne and fellow CSU entrepreneurship professor Kipp Krukowski started analyzing data from the aftermath of the 2007-09 recession to determine what lessons could be carried over for small business owners in the coming years.
They mainly analyzed transactions involving restaurants, in part because this was one of the industries most disrupted by the pandemic. However, they said that the takeaways from their research can be utilized by small business owners across all industries.
DeTienne and Krukowski come from two different backgrounds. DeTienne and her partner have owned and sold numerous small businesses. Krukowski, meanwhile, owned and later sold a business brokerage and valuation firm that helped small business owners with preparing their companies for sale and the confidential business selling process.
Read their takeaways for small business owners who are considering selling below.
Think about an exit plan sooner rather than later
For many small business owners, selling represents the culmination of a lifetime’s worth of work. Nevertheless, research shows that only around half of those who own a business have considered how to exit.
“For a small business owner, the company is usually their largest asset, with much of their net worth tied up in the business,” Krukowski said. “With that being said, a small business is typically an illiquid asset. It’s challenging to sell. So, anything an owner can do today to put their business in a better position for an eventual transition will help in the long run.”
Krukowski and DeTienne recommend that business owners document their processes and keep better financial records even before their business goes on the market.
“There’s lots of unknowns when operating a business, so taking steps to reduce uncertainty will improve current operations while making the business more desirable at the time of exit,” Krukowski said.
Make sure the buyers and sellers are on the same page
A significant focus of Krukowski and DeTienne’s article involves “information asymmetry,” or what can happen when either a buyer or seller has more information about a business than the other person.
“If you’ve been around small business owners, you will note that some things are done on the fly and processes may not be very detailed or organized,” DeTienne said. “They know how it works, but there is a big gap between what the owner and the potential acquirer knows. Reducing this information asymmetry can improve outcomes for both parties.”
Consider seller financing
When small businesses are sold, deal terms often consist of acquirer equity, lender-secured senior debt, and seller financing. “Our results showed that the deal structure differed in the 24 months following a crisis,” Krukowski said. “We also saw a clear connection between time and willingness of financiers to accept risk. In the near-term, sellers desiring to exit will likely need to absorb more of the risk.”
To make a business more attractive to a buyer, DeTienne and Krukowski recommend seller financing.
“It’s a way in which the seller is sort of guaranteeing the business, because if the person that acquires it can’t make it, they’re not getting paid,” DeTienne said.
How seller financing works is that the seller of the business offers a loan to the buyers that is repaid in monthly installments with interest.
“It provides the buyer with some assurance that this is a viable venture,” DeTienne said.
Read more of their findings in Business Horizons: col.st/iPiZd.