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If you are a small business owner who is looking to sell your company in the face of a gloomy economic reality, you might be better off waiting a few months to see if the economy improves. A survey from BizBuySell.com, a Web-based marketplace for buying and selling small businesses, suggests the business-for-sale market is suffering during this economic crisis.
While hiring rates among small to medium-size businesses is still growing, albeit slowly, BizBuySell’s fourth-quarter insights report discovered the number of closed transactions reported in the fourth quarter of 2008 dropped 20 percent as compared with the same time period in 2007, to 1,232 transactions from 1,541 transactions.
“Clearly, the market faces a number of hurdles right now that make it more difficult to get deals done,” said BizBuySell General Manager Mike Handelsman. “There is still a lot of activity and many deals are getting done, but there has definitely been a slowdown relative to what we saw last year.”
The report also found that compared with the same quarter last year, both revenue multiples and cash flow multiples have declined. Revenue multiples on reported closed transactions dropped from 0.687 to 0.685 year over year, representing a 0.3 percent decline. Similarly, cash flow multiples dropped from 2.80 to 2.68, representing a 4.5 percent decline. The revenue and cash flow multiples are calculated by dividing the selling price of the business by its reported annual revenue or cash flow. The median sales price for closed transactions also declined year over year, from $187,700 to $177,500.
“Declining valuation multiples imply that there is considerable uncertainty about future revenue and cash flows for small businesses,” Handelsman said. “In this economic environment, buyers are going to be skeptical about whether a business can maintain the same level of revenues and cash flows going forward. That plays out in their offering a lower price for a given business than they might have offered in better times.”
The report does offer advice to SMBs who are looking to get out of the game, as well as buyers looking to expand their business portfolio. For buyers, the report suggests possessing enough cash is an important competitive advantage. “Buyers with cash may be able to find some great deals right now and will receive a warm welcome from sellers,” the report notes. However, BizBuySell recommends that buyers should not only have cash to buy a business, but a cash cushion as well to weather potential business challenges or losses for some time, given that some economists don’t project an economic turnaround until 2010.
For sellers, because of the ongoing credit crunch, they may want to offer seller financing, which is when small business sellers allow the buyer to pay some of the purchase price of the business in the form of a promissory note. It acts like a bond for performance to assure that the seller will live up to the promises made to the buyer during the sales process, seen by most buyers as an indication that the seller has faith in the future of the business.
The report closes by warning those sellers who might be considering postponing their business sale, noting that some sellers have taken their companies off the market, waiting for a better time to sell. “Given that uncertainty in the market may be even greater than many buyers realize, it may still be a good time to sell,” the report states. “Sellers should be realistic about whether they will get a better price in the future, even if they now wish that they had sold out before the market downturn.”