Popular sentiment among business owners considering the sale of their businesses is that it is not a good time to sell. These fears stem from the recessionary strains being experienced by the business and their potentially diminishing effects on the company’s valuation.
Although your business may be experiencing a down year, that does not mean it is not a prudent time to sell. Consider the concept of marketability. Marketability is the measure of an assets ability to be bought or sold.
The marketability of your business is dependent upon:
- the supply of comparably sized businesses within your industry
- the location of similar businesses currently offered for sale; AND
- the corresponding buyer demand for these businesses.
At present, there are significantly more business buyers in the business transaction marketplace than there are businesses available for sale. The primary reason for the lack of supply is the incorrect perception above; that it cannot be a good time to sell because of the condition of our economy.
Reasons for the high buy-side demand are as follows:
Individual Buyers – A number of workers have recently lost their jobs, are disenchanted with corporate America, and are reconsidering their futures as employees. A number of these individuals are considering the purchase of a small business as a way to earn their future living.
Strategic Buyers – Existing small and medium sized businesses are finding it difficult to grow their businesses due to a decline in consumer spending. Smart management teams realize that the fastest way to grow an existing business is through acquisition. As a result, management teams are scouring the marketplace looking for acquisition opportunities that will allow them to geographically expand, diversify their product and service lines, vertically integrate and continue to grow.
Financial Buyers – While these professional buyers have always had minimum size requirements for potential acquisitions, these minimums have loosened as deal flow has slowed. The decrease in available acquisition targets has forced many private equity firms to shift their focus to smaller add-on acquisitions that compliment their core portfolios. Small businesses that would not meet the minimum size requirements for private equity during its heyday are now finding themselves to be attractive acquisition targets.
As a seller considering an exit from your business, more needs to be considered than strictly your valuation when determining timing. A slight decline in your financial metrics over prior years may not warrant a delay in sale. Many times an increase in the marketability for your business will sufficiently offset the decline in your financial performance.
