Business Buyer's Market?

With all of the layoffs from Wall Street and the Financial District, there are more buyers in the market looking for a business. This, coupled with the fact that some businesses are experiencing a downturn along with the market, prompts buyers to come in with an offer that is far below the listed price. Granted, some businesses are experiencing a drop in gross sales, and their original price may need to be lowered; however, there are still some local markets experiencing stability and some even growth. It is, therefore, important to not value or price businesses based solely on the current national economy.

Sellers often must face the reality of what their business is really worth, not what they would like it to be worth or even what they need to sell it for. When business brokers begin preparing businesses for market, they will typically look at the last three years tax returns, profit and loss statements, and balance sheets. They take this information and recast it, adding back items that the next owner might not run through the business since they aren't necessary to running the business such as country club fees, manager's salary, etc. Based on the recasted financials and comparative sold businesses, a multiple is arrived at for the Seller's Discretionary Earnings (SDE), i.e. 2.5 x $130,000 equals the listing price of $325,000.

The most important aspect of pricing a business is still the most recent historical financial performance and how the business is currently doing. For the businesses that are continuing to show strong financials even though their market area may have a high unemployment rate and other local economic downturn indicators, there would be no reason to decrease the purchase price of those businesses. In fact, businesses that are continuing to do well in current economic times may actually be worth more than originally thought.

Buyers should be on the look out for those businesses that are doing well in the current economy. A good case could be made for decreasing one's risk by purchasing a well-performing business instead of just rying to buy a business at the lowest price. In the long run, the buyer may see a higher return on their investment.

Misconception for Small Businesses

So many people assume that when there is a recession that small business must shrink. Not only does the small business market offer continued growth during a recession, it also offers relative stability. Take a look at the growth rate of the small business market versus that of consumer spending.

Consumer spending sports impressive growth rates during the best of times but also suffers big swings during recessions. Conversely, the small business market offers a more stable source of revenue through good and bad economies. Year after year changes in the small business growth rate are less than a third of the drops seen in discretionary consumer spending.

Small business is not only an important source of diversification for enterprise companies but also a relatively safe haven for investments during recessions.

Plan for succession and a possible sale.

Of family owned companies, 30% will experience a change of ownership due to retirement within the next five years. This is according to the Research by the University of North Carolina’s Ashville’s Family Business Forum. More than half of the family-owned businesses' CEOs nearing retirement age 61 and older haven’t chosen their successor.

More retirees are finding that their children really do not have any interest in taking over the family business. This means you will need more time than you think to prepare your company for sale to an outside party.

You may find that an employee or employees may want to buy your firm. They typically will need bank financing or a private-equity partnership, and that will entail having good financial statements to show to lenders or investors.

Of course an unexpected illness or death can disrupt even the best of plans, so plan on the unexpected. Control what you can. Have a buy/sell agreement ready which will outline the terms under which a potential successor can value and buy your business.

Make sure you have talked with your tax planner to see how estate taxes might affect you as well. They are typically based on the fair market value of the company upon the date of the owner's death. Hopefully you are seeing the importance of using financial and legal experts knowledgeable about retirement and estate planning.

Being Flexible During These Changing Times

You must remain as flexible as possible if you plan on selling your company or making an acquisition while these weak credit conditions are occurring.

If a good opportunity comes along you will need to act quickly. Quickly does not mean skipping any of the due diligence steps required. Using experienced advisors can assist you in evaluating a potential deal and help you include escape clauses in your purchase agreements to provide an exit.

Buyers--They are a changing!

In the past the private equity groups (PEGs) were only made up of a few strategic buyers and mainly were financial buyers who looked for undervalued companies to go in and build and sell in a few years for a nice profit.

This has changed. If you are planning on selling, you can expect primarily strategic buyers who are hoping that your company fits into their larger investment strategy. Also count on fewer buyers knocking at your door.

Hard Financial Times

If you have heard that there were fewer Mergers and Acquisitions (M&A) transactions completed in 2008 versus the previous year, you heard correctly. According to Piper Jaffray, there were $29 billion in M&A deals (212 deals) in the first quarter, compared with $219 billion (1,147 deals) over the same period the year before.

Access to capital is more limited, especially for smaller, less-capitalized companies. Issuance and trading are down in markets such as bank loans, mortgage-related financing, auction-rate securities and other formerly liquid sectors. Many major Wall Street institutions are avoiding making unwise choices right now due to what they saw happen to Bear Stearns.

Recession Proof Businesses? Do they really exist?

Yes, they do. People still need to buy things. The trick is finding the businesses that offer products and services that are always in demand or are necessary. These businesses can be solid investments during tough times. To make the chances of success even better, the business needs to offer a structured marketing and business model to help the new business owner get to a running start more quickly. Franchises offer the edge that other opportunities do not.

All the gloom and doom that we are reading about out there makes the idea of starting or getting into business for yourself sound a bit crazy. Still businesses have thrived during past recessions and many will flourish this year. Both Microsoft and Google either started in, or accelerated through downturns early in their lives.

A few ideas for recession proof franchises offered are:

Education is probably not going to change a lot even during a recession. Tutoring is still going strong because parents want the best for their children no matter what is happening in the economy.

Temporary Staffing Agencies- Historically a recession actually can help in the growth of temporary staffing. While companies are laying off hundreds of workers, they still need the jobs done, so this can be the stop gap measure to save money and still be productive.

Health and Beauty- This is a business that cannot be outsourced or done oversees for you. It is a needed service, and if a family can have it done economically, the business will thrive. Fitness centers are also still doing well. We know that staying healthy and exercise is the key to a long healthy life, so we don’t cut corners when it comes to that.

Home Improvement Companies- Most people are staying put and not moving to larger homes, so they fix up their existing homes. Home improvement companies continue to thrive no matter what the economy is doing.

Health Care Businesses- Health care companies generally do well because in a recession, people get sick just as much and sometimes more than boom times. Since there are more and more baby boomers having the responsibility of taking care of their parents, home health care and health care products have a very good chance of doing quite well.