It’s obvious that in a booming economy buyers for medium sized and large businesses are more enthusiastic about business purchase and perceive a low risk in business transactions. The demand increases as a result an so do business values. This is not so obvious for smaller size businesses for the following reasons:

1. Small business valuations are already on the lower end of the valuation spectrum because of their high dependence on their owners. Business buyers are always afraid that the business is the owner and no value will be left when the seller leaves. Therefore, even in a slow economy these valuations still look attractive to buyers.
2. Small businesses are more like a job replacement than an investment. New owners have to be very involved in the daily activity of the business and as a result they have more control over the business destiny and they perceive a lower risk in purchasing the business.
3. In a slow economy laid-off workers looking for a job replacement find business purchase a very good alternative, which increases demand for small businesses and put an upward pressure on prices that balances the negative effect of the general business pessimism.

Moreover, a businesses seller that is ready to sell but deliberately waits for the economy to improve might be making a poor business and life decision. Small business success is largely a function of the owner’s enthusiasm and hard work. If the owner looses interest in the business, the business generally deteriorates very quickly and loses most of its value. This loss is in most cases much bigger that the potential increase in value that could happen if the economy turns around.

Additionally, even if the economy turns around, which might take a few more years, the business sellers will still needs to wait some additional years to repair the business financial statements so they look attractive to buyers. It could be five additional years or more before the seller could consider selling again.

If the seller has a good reason to sell, then waiting five additional years is in most cases not a viable alternative. After all a seller desiring a complete change in his/her lifestyle should be the one deciding when to do it not external events such as economic conditions!

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 seeking  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.