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How Do Certain Economic Factors Affect The Sale Of A Small Business?



Posted By: Business Broker: Southern California.   Small business sales happen in good times and bad, but even good economies affect the way in which they sell. But the truth is that not every small to mid-sized business sells and not every marketplace is good. I explore these concepts and other factors that affect a sale in this BizBen Discussion.

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.

A simple mantra says it all, "The best time to sell is when the business is doing well." Waiting for the right business cycle can be a fatal error. Waiting to sell until there is no other choice, often results in no sale at all. Whatever the current state of the economy, a business owner can benefit from receiving an objective market valuation of their business from a professional business broker, rather than just assuming they know the value of the business at any particular point in time. Sometimes during economic downturns when it would be counter-intuitive to sell a business, there could be many potential buyers who can't find a job because unemployment is so high. When in doubt, consult a broker.

A simple mantra says it all, "The best time to sell is when the business is doing well." Waiting for the right business cycle can be a fatal error. Waiting to sell until there is no other choice, often results in no sale at all. Whatever the current state of the economy, a business owner can benefit from receiving an objective market valuation of their business from a professional business broker, rather than just assuming they know the value of the business at any particular point in time. Sometimes during economic downturns when it would be counter-intuitive to sell a business, there could be many potential buyers who can't find a job because unemployment is so high. When in doubt, consult a broker.
The Great Recession was a disaster for many businesses and business brokers. I started selling businesses in the mid 1990s, and as we got into the early 2000's up until 2006-2007, the prices of businesses went up, up, and up. I would ask buyers where they were getting the money, some said, they emptied out a retirement fund, while many said they were going to pull the money out of their house (Home Equity Line of Credit).

Coffee shops that would normally sell for 75K were now selling for 200K-225K in the mid 2000s, because money became so easily accessible, and the economy was on fire. The buyers who bought at the height of the market, mid 2000s, would call me 4-5 years later (2011 and on) and ask how much they could get, and were disappointed because money had become harder to get and prices went drastically down (or back to normal). Sellers were frustrated because for a while they were all getting cashed out, but now we had to go back to the old days of 50 down/50 owner carry.

Businesses will always sell, because people will always be willing to or have to buy a job, either because for immigration purposes, they were forced out of the corporate world, or they have just always wanted to be their own boss.

The Great Recession was a disaster for many businesses and business brokers. I started selling businesses in the mid 1990s, and as we got into the early 2000's up until 2006-2007, the prices of businesses went up, up, and up. I would ask buyers where they were getting the money, some said, they emptied out a retirement fund, while many said they were going to pull the money out of their house (Home Equity Line of Credit).

Coffee shops that would normally sell for 75K were now selling for 200K-225K in the mid 2000s, because money became so easily accessible, and the economy was on fire. The buyers who bought at the height of the market, mid 2000s, would call me 4-5 years later (2011 and on) and ask how much they could get, and were disappointed because money had become harder to get and prices went drastically down (or back to normal). Sellers were frustrated because for a while they were all getting cashed out, but now we had to go back to the old days of 50 down/50 owner carry.

Businesses will always sell, because people will always be willing to or have to buy a job, either because for immigration purposes, they were forced out of the corporate world, or they have just always wanted to be their own boss.

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