In the midst of possibly the worst economic downturn of our time, it's safe to say that small business owners across the country are looking for answers on how tough times are affecting the value of their businesses. Should owners hold onto their companies until conditions improve or list them for sale now?
Business owners struggling with this decision need to consider what is happening specifically in the small business economy. A report by BizBuySell.com tracking the health of small business revealed -- as one might expect -- a decline in business-for-sale transactions and valuations. Additionally, the number of closed transactions reported in the first quarter decreased by 36 percent as compared to the same time period in 2008.
The value metrics for businesses are also dropping. By dividing the selling price of a business by its annual revenue or cash flow, we can determine how small businesses are faring in the current economic environment. Revenue multiples for closed transactions dropped 5.5 percent to .69 in the first quarter of 2009, while cash flow multiples fell 3.8 percent to 2.69. Finally, the median business sale price for closed transactions decreased 17.3 percent to $165,500.
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It makes sense that valuation multiples are going down. Buyers are hesitant to pay typical asking prices for a business because of less certainty that the business will bring in adequate revenues and cash flows in the future.
Buyers are also facing difficulty accessing the capital necessary for business purchases. Traditional avenues of securing capital such as SBA-backed loans have become more limited, and with recent stock market declines, fewer buyers have the funds necessary to buy without a loan. This means fewer buyers are able to bid on most businesses, creating less upward pricing pressure.
That is not to say that buyers aren't out there. Economic conditions have made it more difficult to close deals; however, business brokers are reporting a record number of buyer inquiries as a result of the huge number of corporate layoffs over the last six to nine months. Slow closing deals notwithstanding, people are looking at entrepreneurship as an alternative to the traditional job search. Selling prices are expected to continue to decline, which could mean that in the near future, credit will slowly become more available to aspiring buyers. This should improve market conditions for small business transactions over the next few quarters.
How can you best reach buyers if you're thinking of selling a small business in this economy? Here are a few tips to keep in mind:
Seller financing is key . Providing seller financing shows you are confident enough in the financial capabilities of the business that you believe the new owner will be able to pay you back with interest.
Get your business in top shape . To get in front of select buyers and give yourself the best chance to close the deal, you must make sure your business is in the best shape possible. Get your books organized. Invest in that renovation you've been meaning to do for months. Ask others what they love about your business and include the information in your listing. It's essential that qualified buyers know exactly why they should contact you. Be truthful, but be sure to mention everything that's great about your business.
If you're serious about selling, don't put it off for better times . If your business is currently on the market or you plan to put it up for sale soon, don't hesitate with the idea that better times are around the corner. There is no guarantee that the economy will get better in the near future. In fact, many believe it has a long way to go. If you wait too long and times get even worse, you'll probably wish you listed the business for sale sooner and got a better price.
Mike Handelsman is Group General Manager of BizBuySell.com--located in San Francisco--and BizQuest.com, two business-for-sale marketplaces. Both sites feature business valuation tools that draw from the largest databases of sales comparables for recently sold small businesses, and two of the industry's leading franchise directories.