Joel Lederhause, head of DiscountRamps.com in West Bend, Wis., is trying to sell a majority stake in the company before 2013.
By KATHERINE REYNOLDS LEWIS
Published: December 21, 2011
Looking back, Cyndi Finkle wishes she had sold her craft services company, Sunday Night Dinner, early in 2008 when the economy was booming. With a track record of 30 to 50 percent annual growth for each of the previous five years, it could have been a compelling transaction.
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At the time, however, she was not emotionally ready to part with a business she had started in 1997 and built into one of the largest suppliers of services to television crews and casts in Los Angeles. When her husband suggested selling, “I burst into tears and looked at him as if he were telling me to cut off my arm,” Ms. Finkle said. “Then everything changed, and I realized he was right.”
But the recession hit, and Ms. Finkle’s annual revenue dropped sharply along with declining television advertising and production budgets — making it impossible for her to sell. “I’ve had to work really hard the last three years to save my company and get it back, a lot of times working for free,” she said. “It was no longer about building it, it was about keeping it going until things got better.”
Revenue for 2011 is finally back to 2008 levels, about $1.2 million, and Ms. Finkle is eager to sell. For one thing, she purchased another business, an art studio aimed at children, backed in part by a loan from the Small Business Administration. Moreover, the coming expiration of the Bush tax cuts means that by the end of 2012, the long-term capital gains tax rate will increase to 20 percent from the current 15 percent (unless Congress passes legislation extending the lower rate).
Failing to sell before the end of 2012, she said, could cost her tens of thousands of dollars, “and knowing that motivates me to sell in 2012.”
Ms. Finkle is not the only small-business owner looking to the new year as an opportune time to sell. There is a pent-up pipeline of owners who have had to put off selling in recent years because of the economy. And now that many of these companies have at least one year of profits on the books, they are more attractive to potential investors.
“A lot of these companies are having record profits because they reduced their overhead in the downturn and now sales are coming back,” said John D. Emory Jr., chief executive of Emory & Company, a Milwaukee-based investment banking company that specializes in selling businesses with $10 million to $100 million in annual revenue. “A lot of owners have told me they want to start a sale process in the first half of 2012, hoping to complete the sale before the end of 2012. Many owners, especially the leading edge of the baby boomers, wanted to sell in 2008, 2009 or 2010 and would have sold in those three years had the economy stayed strong.”
Those looking to sell are taking steps to appeal to buyers: trimming costs, diversifying revenue, upgrading financial statements and making the chief executive’s role less essential. And they are braced for the sales process to take longer than they would like.
For most owners, the business represents their largest asset, and taxes constitute their largest single expense, said Mackey McNeill, a certified public accountant in Covington, Ky. “The ability to negotiate the best possible selling price and to minimize taxes determines the owner’s financial fate,” Ms. McNeill said.
To illustrate the impact of the expiring capital gains tax cut, Ms. McNeill created hypothetical companies that would sell for $5 million and $10 million each, assuming typical values for equipment, depreciation, real estate, inventory and good will. According to her calculations, and assuming Congress does not act, the owner would save $150,000 in taxes by selling a $5 million company in 2012 instead of 2013. For a $10 million business, the savings would be $325,000. These assumptions cover both S corporations and limited liability corporations, Ms. McNeill said. They would not be valid for a company operating as a C corporation.
The tax savings are an important factor in Joel Lederhause’s quest to sell a majority stake in DiscountRamps.com, a retailer of loading, hauling and transport equipment based in West Bend, Wis. “We won’t continue to grow 15 to 20 percent a year unless we have some outside capital influx,” Mr. Lederhause said. “We want some money to go into the company to accelerate its growth, and take a portion of our sweat equity off the table.”
The company, which projects $22 million in sales this year, keeps about $6 million in finished goods in its warehouse, which limits its growth potential. DiscountRamps.com offers 11,000 different products, and keeps at least one of each item in stock. With an infusion of capital, Mr. Lederhause said, the business could grow to more than $100 million in five years by expanding its product lines into promising new markets.A