Buy a business in 2010. Things are shaping up to make it one of the best years ever to do so.
I offer you this advice as someone on the “inside”. I am a business broker. I spend my life engaged in activities such as valuing small businesses, planning exit strategies for business owners, locating financing for transactions and creating markets in which private businesses can be sold. I do this primarily in Pittsburgh, PA but also spend time as far north as Erie, PA as far south a Morgantown and Wheeling, WV, as far east as Altoona and as far west as Cleveland, OH. The similarity between all these markets when it comes time to buying a business is that the time is right, right now.
Realistic Seller Expectations – Back in 2007 when the M&A market was booming many small to mid-sized business owners were seeing dollar signs. Businesses were being sold at exorbitant valuations and banks were financing deals freely. With the market collapse that occurred in 2008 and 2009 business owners expectations have changed. The bubble has burst and seller’s expectations have realigned accordingly.
Increase in Quality Inventory – During 2008 and 2009 many of the businesses being offered for sale by brokers and intermediaries were not of the highest quality. Businesses were listed because the owners were financially forced to do so, not because the business was ready to be sold. Desperation flooded the market. It was nearly impossible to tell the difference between a bargain and a bankruptcy. Since then things have changed. The fledgling businesses have faltered and the inventory of businesses for sale has been thinned. Only the strong have survived.
Demographics – Pittsburgh, Cleveland, Morgantown, Wheeling and Erie are all “rust belt” cities with substantial baby boomer populations. Many of these aging baby boomers are business owners soon to retire. Their children have gone away to college or have relocated to new cities, built lives of their own and have little interest in the family business. This leaves the baby boomers anxious to exit but with few options outside of a third party sale.
Last Year for Low Capital Gains Rates – Depending upon how a business sale is structured, certain amounts received by sellers in the sale of their business will be taxed as capital gains. Capital gains rates are currently 15% and set to expire on December 31, 2010. It is anticipated that rates will increase to at least 20% in 2011. So, business owners considering selling their business will save 5% in taxes by consummating a sale in 2010 versus waiting until 2011.
Low Interest Rates, Increased Access to Credit – While the times of free flowing capital have come and gone, so have the times of frozen capital. Access to capital has increased over the past several months and that trend should continue through 2010. Buyers will be required to make an equity contribution of approximately 20% of the deal value and sellers may be required to take back some paper. But, rates remain low and for “qualified” buyers, capital is accessible.
In isolation these factors may not provide overwhelming support for 2010 being a great time to buy a business. But collectively, they make an excellent argument for 2010 being “the year” to buy a business in rust belt cities like Pittsburgh, Cleveland, Morgantown, Erie and Wheeling.