We talk to owners constantly who are ready to exit their businesses but think now is the wrong time because of the recession. We even have owners who received great offers for their businesses that assume the offer is depressed because of the current economy and reject the bid.  In some of these cases, the offer and deal structure is far superior to the one they received before the downturn. See our earlier blog entry for more information 2009 is a Horrible Time to Sell My Business, Isn't it? 

To these two groups of owners I would like to relate a true story, names changed to protect the (you fill in the blank), about a business owner we have been talking to over the last four years.  We first spoke to Ben Adams in 2005 after he had expressed interest in learning what his business was worth if he were to exit. Ben had an established family owned multi-tiered lumber business based in the Southeast, Adams Lumber. Adams Lumber was an integrated lumber business.  They owned the timberland, the saw mill and kilns and had set up an enviable regional and international network of distributors. They were on the top of the world in 2005 with the building boom having gross sales in excess of $30,000,000 and great margins based on owning the entire supply chain. They could optimize their business by supplementing their own resources in the most profitable areas. If logs were highly valued, they could cut more timber.  If logs went down in value, they would buy from others and use their processing/distribution for maximum profits while letting their trees get bigger.

We spoke to Ben Adams again in 2006 and growth was flat but profits were up through optimization of the supply chain. Ben had also finally made the move from his small local bank to a regional bank(that had been courting him for years) giving him larger credit lines at cheaper rates resulting in more dollars to the bottom line. Some of the timberland was worth more for residential development and he had it rezoned.  They considered selling the land, but were waiting until values were at there peak. Multiples and valuations were high, so we told him again this was a great time to sell especially if the growth had slowed he basically had maxed out the value of his business.

In 2007 when we spoke to Ben things had slowed in the lumber business as building in areas like Florida had stopped and some national builders were slowing down. We told him he should really think about getting out now based on two good years of financial data.  We told him the slow down would decrease the value of the business somewhat, but he was still way ahead of where he ever expected to be three years ago. Ben thought the slow down would be short lived and the demand for his products would come back in short order …“Hey, builders are always going to need 2 by 4's.”

Well, by 2008 Ben’s business had shrunk to pre-2003 levels and he was nervous about his window of opportunity.  We told him that some turnaround funds were rolling up lumber companies with a plan to take advantage of the economies of scale scenario and ride out the downturn.  At that point, we could still get him a decent price for his business.

Ben cut off all communications with us until March of 2009 when he contacted us out of the blue. We went out to lunch and learned that the $30,000,000 business was now a $3,000,000 dollar business. Adams Lumber had laid-off most of their employees and Ben and his son were directly involved in running the saw mill. Other timberland and saw mill owners were suffering and had to sell their products below their cost. Ben was buying green cut wood from other saw mills, drying it their lumber kilns and selling it to their distributors at some profit. There were problems though; their kilns were designed to run on the saw dust waste from the saw mill which wasn't there.  In fact saw dust was hard to find and expensive to transport. One of the kilns could run on propane, but that really cut into profits. The timberland they thought they could sell for development was now worth little for that purpose and they were considering selling it to a hunting club. Ben went to the regional bank he had changed over to in 2006, told them that business was slow and asked for a reduction in his interest rate to help him get through the downturn. The regional bank responded by asking Ben for full financial documentation to justify the credit line and would not respond when Ben asked if they were going to call in his balance…something he thought the small local bank never would have done. We talked to Ben about finding a buyer of distressed companies with the idea he could salvage more than a forced liquidation sale or bankruptcy.

Here we are in June 2009, Ben doesn't answer his cell phone and his e-mail address now bounces. We sincerely hope Ben was able to work something out with bank and we will hear from him again. Hopefully sharing this story will help some other owners who are on the fence realize that you never know what the future holds. It is 2009, we are in a recession, capital gains tax is at 15%, the stock market is up today, Europe is in worse shape than the US, China is buying oil and iron oar and “builders are always going to need 2 by 4's.”  I can tell owners what their business is worth now and bring them willing buyers, but is up to them to know when to hold them, know when to roll them, know when to walk away, or know when to run. If they are ready to walk away we can help.