As Jack Stack wrote in a recent blog post, it’s hard to know what to think about the economy these days with so many contradictory headlines vying for our attention. In times like these, I seek out the industry veterans to add some much needed perspective to what continues to be a difficult conversation.
Tom West, founder of the Business Brokerage Press and author of several books on the business brokerage industry, is one such voice. His many publications include a monthly newsletter that features a popular opinion column authored by the Old Pro. A fictional business broker based on Mr. West’s late father-in-law, the Old Pro dispenses pearls of pithy wisdom about buyers, sellers, brokers and getting deals done.
I decided I needed to hear what the Old Pro has to say.
How has the current economic climate affected business valuations?
Mr. West: I’m not sure how the economy has affected business valuations, but it has certainly impacted what business owners can sell their businesses for. After all, the price is ultimately what someone is willing to pay for a business — the valuation is unimportant. The price is generally based on a multiple against earnings, and as we know, earnings are down dramatically. The selling price is reduced accordingly. Even a multiple against sales would be based on much lower sales.
The sad part is that a business can show increasing sales and earnings until the past year or two when — like everything else — they started heading downward. Buyers can’t see past last year. Sellers who have to sell may have to accept less than their business is worth. It is a great time for opportunity-seeking buyers, but most of today’s buyers are afraid of making that leap of faith that is so necessary in buying a business. Today’s buyer wants a sure thing.
Buyers also can’t pay as much as they could in the past, and they have less cash to put down. What happens now in my opinion is that full price offers will go up to compensate the seller for less cash down and for offering seller financing at currently low interest rates. As statistics show, the amount of the down payment in seller-financed deals directly impacts the final sale price: The more cash, the lower the price.
Is there anything the S.B.A. could be doing to support small-business acquisitions?
Mr. West: Another factor impacting the price of businesses is that the S.B.A. has pulled back dramatically and has also tightened their rules and regulations, like requiring third-party valuations for larger businesses.
Unfortunately, government has ignored small business. The S.B.A. defines small business as anyone with 500 employees or fewer, when in fact approximately 85 percent of all businesses have about 10 employees. If those small businesses hired just one additional person, unemployment would be completely eliminated.
Is there anything about the current market for buying and selling small businesses that has surprised you?
Mr. West: I thought that unemployment would increase the sale of businesses — especially the Main Street type — as some people realized their jobs weren’t coming back. I still feel that this will happen. We’ve seen a slight increase in the sale of businesses in the first half of 2010. The mood at the recent IBBA conference was definitely more upbeat.
What advice do you have for business owners who may be waiting for an economic recovery before selling?
Mr. West: Too many business owners are waiting for the “big recovery” that will make their businesses worth what they were some years back. It ain’t going to happen. It’s like my house; I will be waiting a long time before its price goes back to what it was in the early 2000’s. Business owners who want to retire, have pressing issues forcing them to sell, or have lost interest in their business should take a few steps to maximize the value of their business.
For example, I drive around in the evening and see businesses where the neon sign has a few dark letters so that you can’t make out the name. That tells me the seller has lost interest in his or her business. If I walk into a business and see empty shelves, messy counters, old tattered menus (unless it’s a diner, of course), or a business brochure that looks like it was done 15 years ago, these are all signs of an owner who has lost interest.
Clean the place up, get new printing, fill the shelves — even if you have to borrow the money. Be prepared to help finance the sale of your business, and accept a reasonable down payment. People who put down a good portion of their savings aren’t going to walk away from it. You’re the seller, so you know if the buyer can make the payments and still feed his family.
Lastly, drive around the area, walk around your business and take a serious look at your financials. Would you pay what you’re asking for the business? Take what you can get for it and move on with your life. A business is somewhat like a boat. The two happiest days of your life are the day you open the doors as the proud new owner, and the day you walk off into the sunset free of all the problems.
Of course, there are many happy days in between. Owning a business is the best lifestyle anyone can have.
Barbara Taylor is co-owner of a business brokerage, Synergy Business Services, in Bentonville, Ark. Here is her guide to selling a business.