How does recession affect selling my business?

The number of businesses sold has fallen steeply with some business brokers reporting a decline of 50% or more. Many small offices have closed or consolidated and many sole practitioners have left the industry. As business value is generally a multiple of profit many business owners who had earlier wished to sell are no longer able to realize their previous price expectations (due to profit erosion) and decide to postpone. However, some businesses are selling and for the most part fall into two categories:

1.  Distressed businesses (the owner cannot, or doesn't care to, keep the business alive with additional funding).  These types of businesses are priced at substantially below replacement cost and even below book value. The buyers for these businesses come in with new capital and energy and believe that for the price the turnaround risk is acceptable (not unlike the investor buying a foreclosed home). For a successful sale it is extremely important that the seller act quickly and, as painful as it certainly is, set a price that is competitive with other troubled businesses on the market. As long as the doors are still open, the going concern price will be superior to the proceeds from an auction.

2.   Businesses whose profitability has remained constant and businesses where profit declined but then stabilized.  These companies are now selling at a premium because a) there is a shortage, and b) they allay the buyer's fear that maybe things will get worse after they buy. Financing is still available and has recently improved (The SBA has just dropped the loan guarantee fees-3% plus and revised the guarantee amount to 90%.)

It is necessary, now more so than in the past, to construct an extremely thorough loan package in order for a buyer to get an SBA loan to purchase a small business.  The same applies to the marketing information given to prospective buyers with a story about "why and how the business beat or weathered the recession." There are actually more buyers than last year-there are more senior managers out of work (buying a business is an alternative to seeking re-employment) and there is a paucity of controllable risk, high return investments.

Selling a business always presents challenges. Some points to consider: Confidentiality - how do you minimize the possibility of employees, vendors, and competitors, finding out that your business is for sale? An experienced and competent broker operates on a "need to know" basis by first evaluating prospective buyers and only then having them sign a confidentiality agreement.

When you are ready to sell a business, how do you establish a price? Price too low, leave money on the table, price too high, nothing happens. An experienced business broker will naturally have an intuitive feeling about the marketplace derived from being involved in perhaps hundreds of sales and also has a database of past transactions to compare.

Selling or buying a business is a risk for both parties.  I've seen both parties succeed and also fail.  Whether you are selling your business during a recession or hold off, perhaps the right time is when you are simply ready - we cannot control the economic environment we live in.