Concluding one of the slowest summers in memory, in terms of the number of completed deals and new listing activity (total August 2009 sales of 997 businesses represented a 40% drop compared to the 1,722 deals concluded in August, 2008), we wondered if the fall will bring more activity to California's market of small and mid-sized businesses for sale. So, we asked our Panel of Experts to give us their insight about what we can look forward to in the months ahead.
While opinions were mixed, most feel that activity will pick up as we head into the last part of the year.
Speaking about seller activity, Ian MacLachlan, founder and CEO of Business Team, noted that some sellers have been holding off with the fear that their reduced revenues will translate to lower selling prices. Now, however, MacLachlan observed that more sellers are "willing to put their businesses on the market instead of waiting for a turnaround." He said also that small business owners are beginning to "adjust their price expectations," to be more in line with the market.
On the buyer side, Due Diligence Consultant, Willard Michlin, suggested that since the economy has not collapsed, as some people had feared, there are more people who are getting motivated to look for and purchase a small company. And those buyers devoting their time to the business search are increasingly motivated, Michlin observed, because "they are eating up their savings while looking"¶"
Sacramento Area Attorney Joe Sandbank said he is "definitely seeing signs that buyers are getting back into the market." and Allan Baumgartner, manager of A Better Business Broker, Inc., predicts more sales and listings in the months ahead.
However there's a contrary view expressed by Business Appraiser Bob Klein, who said there won't be improved activity until the lender community "decides to finance business sales." And restaurant broker Mel Jones observed that there is a very low inventory of quality businesses and qualified buyers. "It could be several years before we return to a normal business sales exchange volume"
Full comments from our Panel of Experts Are:
"I don't see any substantial change in business sales as they depend on financing. Until banks and other lenders becomes stable and decide to finance business sales the market will not grow."
Bob Klein - President, Business Appraisals
The Future - Dare we Predict? The future of Business brokerage is always up. More businesses. Better Brokers. Greater need for Brokers to minimize growing risk and navigate regulations in a transfer.
Clients need Brokers to find and structure financing.
Economy under stress extinguishes old technology business and turns over inefficient operators.
Continuing deterioration in the economy accelerates turnover.
Business owners see more trouble coming and will sell sooner before their peers.
As kids return to school there is more time to advance the serious decision "should I sell" and "when to sell my business".
I predict more Business Listings and Sales in the coming weeks and months.
Allan Baumgartner - A Better Business Broker
The marketplace is changing rapidly, seemingly new rules for the business brokerage world are in place every few months. The banks still have not opened their pocket books. Buyers have beat-down sales price earning multiple in anticipation of consumer spending continuing to get weaker or perhaps simply looking to bottom-feed. Seller's with good businesses are willing to accept those lower earns multiples and are reluctant to place their businesses on the market.
We're in a sort of eddy right now. Eventually something will break drawing buyers as well as sellers into the marketplace. But we're not there yet. The inventory of quality businesses is very low. The inventory of qualified buyers is improving, but still low. That being said, the marketplace has improved since earlier this year, but it could be several years before we return to a normal business sales exchange volume.
I don't expect a big uptick in business at all.
Mel Jones - Paramount Restaurant Brokers Inc
I am definitely seeing signs that buyers are getting back into the market. Although August is typically a slow month for small business acquisitions because it's vacation time for many, I was retained by a handful of new buyer clients in August. And at least one of these clients had been on the sidelines for several months. I have many clients and friends that are owners of small businesses, and I am one myself. There's a growing consensus that we've been through the worst of this recession, and that now is the time to position yourself for the coming recovery. If the business lenders out there join in this sentiment, then I think we will see a strong pre-holiday season for small business acquisitions.
Joe Sandbank - Law Office of Joe Sandbank
The number of business we have on the market is down more that 30% compared to two years ago but we are seeing a modest uptick now. Business owners, in some cases, have adjusted their price expectations and are more willing to put the business on the market instead waiting for a turnaround. I haven't seen any erosion of multiples for profitable business. In part, due to the shortage of inventory we are seeing multiple offers on the same business even on those that in the past would have drawn little attention.
I think there is some seasonality for the business brokerage business with a low during the summer. Many of our buyers have become recently unemployed and while they hope to buy a business as a job replacement, if there is no urgency they use their time off (which they might not have again for a while after they become business owners) to enjoy the summer with their kids.
Ian MacLachlan - Business Team Inc.
What I see is that more buyers are becoming motivated to buy then they were earlier. Earlier there was a fear that the economy might worsen after a purchase was made. That fear has subsided because of the positive news about the stockmarket and economic indicators both which have indicated the worst has past and we are moving out of the recession. My personal opinion about the direction of the economy does not necessarily agree with the indicators but that is not what we are addressing here.
The other motivation moving buyers is that they have been looking at businesses that are on first inspection appear to be viable and upon due diligence are not. Buyers are highly motivated to buy because they are eating up their savings while they are looking for a business which they can not find. If sellers would more honestly present their business up front, more businesses would be purchased. Buyers want to buy and want to feel comfortable about what sellers provide. They need a level of trust with the sellers or they will not believe anything they are told and will just walk away rather than offer a more realistic price.
I do not anticipate an increase in listings coming on the market because the profitable businesses will hold on until the market gets much better and they can get a much better price. The motivated sellers already on the market, are hoping to sell based on 2008 numbers and in some cases 2007 numbers. They tell buyers that things will be better soon and that the buyers should buy now before the market gets better at values based on the better market. Of course, if the sellers are wrong, and the market doesn't get better, the buyer would have overpaid and would then find themselves in the situation the seller is currently in.
Both buyers and sellers should be very honest with each other, because if they are not, it causes lawsuits and divorces. A buyer's mistake can easily cost him $100,000 and his life savings and his marriage. Caution is the watchword today.
Willard Michlin - Due Diligence Advisor
Things were very slow from October of last year through early June of this year; however, our office has seen a significant increase in buyer and seller activity in the past ten weeks. It is still a buyer's market but businesses are starting to sell. It seems that some sellers are concluding that things might not get a lot better in the near future so are accepting lower valuations and providing more seller financing than they said they would earlier. We have several listings under contract at this time.
The rising stock market seems to be giving buyers encouragement. I see no reason for the stock market to improve like it has but am happy that it has done so. Retail and most B2C service businesses are still very hard to sell. Rumors regarding the SBA are that they will relax their SOPs on October 1, 2009 by increasing the "goodwill" limitation to $500K. That would help us sell more businesses.
D. Joe Atchison, President, Business Broker, CBI, CBB, CPA, MBA
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