Welcome to my second posting. With all the doom and gloom that pervades all forms of our day to day media influences; I thought that I should offer you a slightly different perspective in my little area of the business world.
The question is: Should you sell your business in this market? The standard response would be no! Your accountant will say no! Depending on your debt levels your Banker might say yes! Your family?
Maybe you are ready to retire, or you have concerns about your health or you just don’t have the energy to take the business through to the other side of this economic downturn, what then? Well, good businesses are still selling for multiples that are not too dissimilar to those of a year ago, especially if your business has maintained its profitability. In fact, if you have a business that is on or about where it was in March 2008 (or even better ahead of where it was), you might even get more because the supply of good businesses is greatly reduced. There are still significantly more buyers in this market than sellers, they are more aware of the market than in previous years, they will have at least 50% equity to make the purchase, unemployment is on the increase and a number of corporate positions or markets simply don’t exist anymore.
If you decide not to sell and take a “hold” position, how long can you hold out? Let’s say the market takes another 18 months to improve, and your business takes a year to right itself, you will then need at least 2 more years of sales at previous levels to be able to sell for a value you are holding out for. This could be ok if you are in your 30s or 40s but maybe not so palatable if you are mid to late 50s or especially your 60s. But let’s say your business is slightly down on previous years and you want to sell and do something different. The old adage “buying and selling in the same market” applies. Yes the proceeds of your sale might be down on what you would have achieved 12 to 18 months ago, but the price of your target business (or property) will also be down, interest rates are lower and just as importantly, sometimes a change is as good as a rest.
This thought is especially proven if you wish to purchase a business larger than the one you have for sale:
- Let’s assume your current business has a value of $1m and profitability is down 20%. Was previously worth $1.2m in 2007, which means your paper loss is $200k.
- Your target business is worth $2m, profitability is down 20%. In 2007 this business would have been worth $2.4m. Your paper gain is $400k and net gain is $200k.
This is a very simple example obviously, and assumes both businesses are good stable businesses; profitability on the target business is still at a level that could sustain an increase in borrowing and there are willing buyers and sellers on both sides of the transaction. But the concept stacks up.
The advice we give business owners is that if you have begun to think about selling your business, then it is time to go no matter what the market. Eventually your business, its performance and especially your staff will reflect your state of mind.
A difficult decision I agree, but a decision none the less. Make the decision with all the information available to you, talk to an experienced broker that can give a handle on where your business sits in this market and what you need to do to position it for the best possible result.
See you all next week.