Contributor: Business Broker: Southern California
23 years ago, someone told me - I don't remember who - that business brokerage was a great business to get into because people were always buying and selling businesses. Good times or bad, he said, businesses were always trading hands, After all, he reminded me, business ownership is a big part of the American Dream.
I'm sure he believed everything he was telling me. Owning your own business does mean that you control your own destiny, reap the full profits of your hard work and build equity in something that you may sell later. But the truth is that not every business sells and not every marketplace is good.
Just look at the Great Recession.
The Great Recession - officially December 2007 to June 2009 - hit business hard, and the damage it did is still affecting the business-for-sale marketplace. During the Great Recession, small businesses were driven out of business in droves and survivors were left hanging on by their fingertips. Would be sellers couldn't afford to sell at the suddenly depressed value of their business; would be buyers couldn't find a money-making business. And if they did, they found their investment accounts empty, their home equity dried up and their ability to buy a business suddenly gone.
Business sales ground to a halt.
Business sales, like most things, are subject to the rules of supply and demand. If there are tons of buyers and few sellers, prices go up. Conversely, when there are few buyers and many sellers, prices go down. This sounds simplistic, but in general, it's true - depending on the size of the business. Large businesses with management in place, strong patents or brands, and a long history are impacted less than "Mom and Pop" main street businesses.
But what about today's marketplace? Businesses are finally profitable, and buyers have gained back much, if not all, of their home equity and investments accounts. Buyers can afford to buy, and sellers are willing to sell based upon their most recent valuation.
So, things are all great, right?
Yes and no. Sales are strong for larger businesses. We typically find more buyers for a $10M in revenues and $1.5M in profits than we do for a $500K in revenues and $100K in profits business. There are more buyers for bigger businesses because the buyer-universe includes other companies, very high net worth individuals, private equity groups and international buyers. These buyers all seek a return on investment which is only possible with businesses with higher earnings. But where we continue to see business sales impacted negatively are with smaller businesses. For the local retail store, deli, or carpet cleaning business, whose owner/operator income (Discretionary Earnings, or "DE") is typically less than $100K a year, businesses linger in the marketplace. The surprising reason - the economy is too good. Unemployment is low so that buyers that otherwise might seek out a smaller business are finding it easier to get a good, high-paying job. This leads them to think, "Why pay for a business when I can make that same income in a job?"
My conclusion: Business sales happen in good times and bad, but even good economies affect the way in which they sell.