Selling a Business During Recession!

Most business sale advisers stress the importance of timing when selling a business. They reasonably argue that business buyers are much more enthusiastic about purchasing a business in good economic times than in bad times. It is reasonable to believe that multiples applied to value businesses vary during the economic cycle and are normally higher during booms than during busts.

Understandably, the business purchase is emotional in nature and buyers are more optimistic in good times. However, I have personally noticed some exaggeration in how the economic cycle is believed to impact the business sale and purchase market. Some business sellers tend to believe that because the economy is slower, their businesses cannot be sold while some business buyers think that they can purchase good businesses for much lower prices. This cannot be farther from the truth!

Unexpectedly, the number of potential business buyers actually increase during recession: As a result of corporate downsizing, the number of unemployed but very qualified business executives increases dramatically in bad economic times. It is generally very challenging for a former corporate executive/employee to find a decent job matching their qualifications especially when they are in their late 40’s/50’s, so buying an existing business becomes a very attractive alternative. These people are generally very resourceful in terms of business skills and financial capabilities. This abundance of qualified business buyers tends to counter the downward pressure on business valuations. This phenomenon is more pronounced for small to mid sized companies that tend to be acquired by individuals generally seekingĀ  to buy a business as a job replacement.

In addition, profitable businesses with good track record of success continue to be in demand even during recession. Only solid companies with viable business models survive bad economic times. Some owners of non-performing and unprofitable companies explore the option of selling their companies as a possible strategy to save their assets. As a result, the supply of money loosing companies increases while the supply of good and profitable businesses decreases. Therefore, good companies can still commend attractive prices during recession.

If you have a good and profitable business and you are ready to sell, you don’t necessarily have to wait additional years until the economy gets better, especially if your business is worth less than $5M.

Comments 1

  1. Thomas Deans wrote:

    You are absolutely correct that even during slowing economic time a business can be sold at a good price. What is critically important is that aging business owners formalize their busiess succession plans and discuss openly with family members how the business should be dealt with in the event of a major health issue or death. Doing nothing is a plan just not a good one. Studies show that most business owners have no formal business succession plan and run the risk of destroying the value locked in their business. Having a will is no substitute for dealing with all the practical issues that need to be dealt with when death or disability strike owners. When shares roll-over to a surviving spouse what does that look like –has your spouse (usually a wife) ever chaired a board meeting. Will she get along with minority shareholders? Better to ask the questions now and plan. In my new best selling book Every Family’s Business I offer 12 questions to guide every owner’s business succession plans.

    Thomas William Deans Ph.D.

    Posted 10 Aug 2008 at 5:38 pm

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