Selling a business Info

Most business advisers insist that when it come to selling a business and getting the highest possible value, timing is everything. They reasonably argue that multiples used to value businesses vary significantly depending on the business cycle.

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!