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!

• Uncertainty about the asking price: small and medium size businesses do not command high price multiples. The selling price should not be the main motivation for selling a company. I frequently see frustration in seller’s faces when I tell them about what asking price they might ask for their business. Sellers say ” if I have to sell my business at this price then I would be better-off waiting another 2 years and earn this money in my business without having to sell it”. My answer is then “yes, wait 2 years and come to see me when you are ready to sell”. The business is worth more to its owner that it is to most potential buyers. Owners sell their businesses for other reasons than money. Reasons include need for change, retirement, new opportunities, sickness, moving, and many other reasons not related to money. However, for larger businesses ($1M and more in value) a deal structured as a share sale involves a tax advantage that makes the sale worthwhile financially.
• Uncertainty about Timing the sale: Most sales of small and middle market companies are driven by personal considerations that in most cases could be delayed. For example a seller contemplating retirement at the age of 60 could wait few more years before effectively retiring. This creates a huge indecision for business sellers. Timing the sale of a small or medium size business is mostly dictated by personal consideration rather economic cycles.
• Uncertainty about how to go about selling: this can be so overwhelming that the business owner keeps procrastinating for a long period before taking the necessary actions. For most sellers, this is a one lifetime event. As a result, sellers lack the  knowledge and experience to go through a smooth sale process. Some sellers discuss the issue with friends and relatives who are not qualified to advise them about it.  Other sellers would seek advice from their accountants or even entrust them with the sale of the business. Accountants however are qualified to do accounting but not to sell businesses. They are capable of analyzing the company financial statements but they are not qualified in marketing the business. Marketing a company for sale is a full time profession called business brokerage and requires a long experience and a variety of other skills including finance, sales, psychology, business strategy, marketing and others.

In my experience, business owners who know why they are selling and have a clear idea about what they will be doing after the sale and who seek help from professional brokers specialised in selling businesses are more successful in selling their companies.

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.

Honesty with business brokers: serious business sellers use the services of competent business brokers to sell their companies. Business brokers will use the information provided by the seller to present the business at its best lights to the right buyers who are most likely to present serious offers. What happens when sellers misrepresent or exaggerate their companies advantages to business brokers? The answer is very simple: the business is presented to the wrong buyers. Brokers put their best efforts to convince these buyers that the business presents a good opportunity for them.

When an interested buyer presents an offer that seller accepts, he/she start their due diligence only to discover that the business was misrepresented. The buyer loses confidence in the seller and in the broker and starts questioning all information provided to him/her. Worse, the buyer feels deceived and realize that they cannot work with the seller anymore. The obvious outcome is: the offer is withdrawn and the buyer gets back his/her deposit. This is a huge waste of time for the seller, the buyer and the broker. It’s a lose, lose, lose situation. Had the seller presented a more realistic picture of the business, the same buyer might still have been interested or another more suitable buyer might have been found. A lot of time and professional fees would have  been saved and the business would have been sold.

Honesty with buyers: when investigating a business to purchase, most buyers have a prepared list of questions and want to get answers directly from the seller. Most buyers understand that no business is perfect and expect the business to have some drawbacks. If the seller starts embellishing the business to the extent that it seems perfect, buyers automatically question the seller’s honesty. Trust is lost very quickly during the discussion and the business seems too good to be true. Of course the buyer loses interest and the seller loses the opportunity to sell the business to that buyer.

Honesty with employees: nobody suggests to tell employees about the possible sale of a business early when the business owner is contemplating selling his/her business. However,  at some point of the sale, key employees should be made aware. It is generally a very bad idea to lie the them about the subject for the simple reason that when they will know (and they will know) the will lose faith in the present owner and in the business. They will assume that the owner lied about many other matters and they will look for alternatives to their present job and/or revenge. The same employees could sabotage the deal by presenting a bleak picture of the business to the buyer and push him/her to walk away from the deal.

honesty is a virtue when doing business and almost always pays off. This is even more true when selling a business whether small or large.