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Selling a business: has business marketplace bottomed out?

cyclist

There's a widespread belief among prospective business buyers that a brief window of opportunity has opened as the businesses-for-sale market has bottomed out, according to a survey by BusinessesForSale.com.

And this raises the spectre of buyers rushing deals through to capitalise and consequently failing to do proper due diligence, according to some business brokers.

The survey of thousands of business buyers, sellers and business brokers from around the world reveals that although 62% of buyers surveyed believe that asking prices for businesses are inflated above their true value (although a sizeable 36% think they're about right), they are expecting vendors to increasingly relent on their unrealistic prices.

Eighty-six percent of prospective buyers believe it's a good time to buy a business, by far the most common reason being that continuing economic uncertainty promises low prices, with about half (49%) citing this reason.  There are also signs that the credit drought is easing, with roughly the same amount of buyers finding it easy to obtain credit as those who believe it's difficult, 28 and 26% respectively.

We are coming out of recession and it makes sense to invest while you still have negotiation opportunites falling in your favour

Buyer canvassed in BusinessesForSale.com's worldwide survey

Buyer anticipation of a rebound in the market is evidenced by the surge in enquiries on businesses listed for sale on BusinessesForSale.com, soaring from 49,600 in March of this year to 83,300 in April. There has been a steady upward trajectory since November 2008 when just 33,700 enquiries were made a month.

Seventy-eight percent of brokers said sellers have tended to sell below their initial asking price, with 20% receiving the initial asking price and only 2% getting above the asking price. A third (33%) expect vendors to realise their asking price in the coming months against 65% who believe they will have to drop prices, suggesting some brokers at least expect sellers to become more realistic, or at least be in more of a rush to sell.

Here is a representative sample of reasons given by buyers for it being a good time to buy:

  • "Buyers market"
  • "Bad time in US, but good time to buy in other countries"
  • "The economy is turning around"
  • "Due to the economy, prices for business are lower"
  • "Recession bottoming out"
  • "If a business is profitable in this economy then it has been well managed. Also believe we are on the bottom and rising economic water will provide additional lift to help the business succeed"
  • "Economic conditions improving"
  • "A lot of businesses are experiencing financial problems due to the recent global financial meltdown, therefore many people will be eager to sell"
  • "Can take advantage of lower prices during recession"
  • "We are coming out of recession. It makes sense to invest while you still have negotiation opportunites falling in your favour"
  • "Asking price should be lower because of recession"

'Narrow-window syndrome'

Common to all these reasons is a perception that we're at a perfect point in the economic cycle for buying a business. There seems to be a widespread belief that the market is bottoming out and is about to rebound strongly.

There are two potential problems arising here for buyers. First, nobody can assume that the economy will rebound in the manner it did after the considerably milder 1990s recession; in fact, even the danger of a double-dip recession has not subsided.

Economists can rarely agree on much, but there are few forecasting anything better than a lengthy period of anaemic growth in advanced economies, whose recoveries are jeapordised through unavoidable public spending cuts, although emerging economies have quickly resumed rapid growth. Most respondents to the BusinessesForSale.com survey, however, are based in the UK, US, Australia, Canada and South Africa, so this is primarily an examination of the market in advanced economies.

Secondly, there's a danger of 'narrow-window' syndrome - where prospective buyers are so preoccupied with buying quickly before the market rebounds that they rush through purchases, failing to conduct proper due diligence. This raises the spectre of buyers paying too much for businesses because they've failed to uncover weaknesses in the business they're seeking to buy.

Jeremy Mandell, head of marketing at Dynamis, which runs BusinessesForSale.com, highlights an additional problem for would-be buyers:  "There appears to be an abundance of buyers in the market for bargains. However, a surge in buying interest will actually have an inflationary effect on prices and there's a risk that many bargain hunters are underestimating the challenges cheap businesses will pose.

"Owners of high quality businesses, meanwhile, could be delaying their exit until their business's value improves along with the economic climate. But owners of struggling businesses naturally have a good reason to sell up - to get out before they go under.

"A business sold at a 'bargain' price' is unlikely to be very profitable and could have many problems. Therefore, it's imperative that a thorough due diligence is undertaken - checking the books properly, examining existing contracts, surveying the premises thoroughly, and so on.

"Yes, there is a real prospect of buying a business cheaply at the bottom of the market and enjoying a rebound. However, many businesses will require a lot of nous and effort to turn around - especially if a double-dip recession transpires."

If buyers flood the market, prompted by unfounded optimism, it could re-inflate the asset bubble. If, as some brokers fear, the quality of businesses is low and a double-dip recession does occur, then a surge in liquidations and bad debt could ensue.

Several brokers commented on a lack of activity in the mid market, which, together with the high volume of large businesses seeking opportunities for consolidation in their sector, reinforces the fact that the top of the market is about to return to rude health.

 

Reasons for buying

There are a wide range of reasons for buying. For some, an established business serves as an additional form of income, for others as a retirement fund. Many enjoy taking over failing businesses - so for them this really is a perfect market - and rebuilding them.

Many see an established business with a proven track record as a preferable route to starting from scratch, which is seen as a riskier, tougher option. Some perhaps hadn't previously considered being their own boss but had recently been made redundant or were anticipating it. Some had recently sold a business and wanted to re-enter the market.

Here are some typical replies to the question of why people wanted to buy a business:

  • "It's an investment that outperforms property"
  • "I have started and sold a number of businesses, most recently a fairly substantial publishing internet and exhibition company. I am not ready to retire so seek a business to keep me busy"
  • "So we can work together as husband/wife team"
  • "Buying a business for my wife and daughter"
  • "Looking for part-time income to fund semi-retirement"
  • "Platform for technology company that I'm currently building"
  • "Just had a baby - single mother, so can't work corporate hours any more

Paucity of credit

The paucity of credit was also a pivotal reason for a surge in buyers. A common complaint about banks was that they would only lend to bricks and mortar, rather than according to intangible factors like goodwill or potential.

There are no tangibles with starting a business, such as existing customers, contracts and facilities - it's all based on potential. Therefore risk-averse banks, many buyers felt, were much more likely to lend for the purchase of a business with a proven track record than a start-up with a higher risk of failure.

Almost two thirds of buyers (63%) had finance in place already when they enquired on a business. The average budget of a business buyer is £208,000.

The sales process was much quicker before the financial crash deepened in 2008, according to brokers. An overwhelming majority - 81% - of those polled agreed that the sales cycle was more protracted, with 48% saying it was "taking significantly longer". In 2008, 12% of business brokers said it took less than four months to sell a business, compared to 2% today.

A rise in buyers withdrawing from deals has been reported, with 55% of worldwide brokers reporting an increase. These figures suggest there has been no appreciable improvement in one of the main reasons for pulling out of deals: obtaining credit.

More than two-thirds (68%) of buyers finance their purchases through banks, while a third remortgage property, a more problematic solution in the new era of credit scarcity.

Financial brokers were an option for 19% of respondents, while selling shares or releasing equity from property or other businesses garnered 15% and business angels 11%. Government support, notably the loans guarantee scheme in the UK, the Small Business Association in the US or the Business Development Bank in Canada, is helping to bridge the funding gap with 8% of buyers seriously considering using government-backed loans or other government financial support.

Owner financing, whereby a portion of the sale price is paid in instalments out of future profits, has become more commonplace since the credit crunch, because it reassures the buyer that the business is robust and in thus helps the vendor convince the buyer to match the asking price. Deferring payment in this way, also known as seller or vendor financing, was considered by 12% of respondents.

Family help

Twenty-nine percent of buyers sought financial help from family. Family and friends was also the first source of advice for more than half (51%) of sellers, whereas 18% turned to their accountant first, 7% consulted their financial advisor, 4% their lawyer and 4% their bank. Sixteen percent ticked 'other', namely:

  • Estate agent
  • Friends
  • Business Link
  • Friend who holds similar businesses
  • Friends with experience of selling businesses
  • Business broker

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