Q2 Small Business Transactions Take a Dip but Strong Market Remains
Small business transactions have been enjoying record numbers. However, during the second quarter of 2019, the numbers have begun to take a small dip. Experts feel that the trade war with China is playing a role, according to a recent article posted by BizBuySell, “Q2 Small Business Transactions Down as Trade War Questions Remain.”
The number of transactions stood at 2,444 for Q2, a drop of 9.6%. On the other hand, businesses are still selling at record levels. There were 4,948 transactions reported in just the first half of 2019, according to BizBuySell. That means that 2019 could be the second most active business-for-sale market since BizBuySell began tracking data back in 2007. Certainly the Q2 9.6% drop doesn’t mean that the sky is falling.
Deals per broker are declining, and many are looking to the current trade war between the U.S. and China for answers. Increased tariffs and associated worries are behind the Q2 dip, according to many experts.
Amost half of business owners — 43% — are experiencing rising costs as a result of tariffs on Chinese goods, according to a recent BizBuySell poll. Small businesses across the board are feeling the effects of the trade war with China.
Ultimately, consumers will also feel the pinch as well with a whopping 64% of businesses noting that they will raise prices in order to address rising supplier costs. Another attention-grabbing statistic is that 65% of small business owners are considering switching to suppliers not based in China, and 54% are looking for U.S. based supplies. If this trend continues it could mark a dramatic shift.
There is, however, ample good news. According to BizBuySell, buyers looking for a business will discover that the supply of quality listings on the market is increasing. In short, now is a good time to buy a business, as the number of businesses listed as “for sale” grew by a healthy 5.2% in Q2 when compared to the same time last year.
The “business for sale” inventory is growing. According to Bob House, President of BizBuySell, “Businesses are performing better than ever.”
Some of the top performing markets by sales included Baltimore, Portland, Seattle, Austin and Dallas. Those interested in buying a business will find that now is truly a historically good time to do so. Working with a seasoned business broker can help you find a business that is right for you. While the trade war has injected some uncertainty into the overall climate, there is no doubt that now is a historically unique time to buy a business.
The Variables Involved in Selling Your Business
Selling a business is a complex process that boils down to this: Finding the right buyer. In a recent Forbes article, “Ready to Sell Your Business? Follow These 3 Tips to Find the Best Buyer,” author Serenity Gibbons, a former assistant editor of the Wall Street Journal, outlines the multifaceted process of selling a business.
Gibbons cautions small business owner to thoughtfully consider when, how, and to whom you sell your stock. “Create a for-sale plan that sets up the business for long-term success,” she recommends. To sell your business the right way, have a coherent and well thought out exit strategy in place. In fact, many experts feel that you should have an exit strategy in place even when you first open your business.
If you’re like most small businesses, a large percentage of your wealth is tied up in your business. Unfortunately, studies indicate that only estimated 20% to 30% of businesses on the market actually find buyers. This important fact means that business owners are vulnerable if they can’t sell. It is vital for business owners to make their businesses as attractive as possible to buyers for when the time comes to sell.
To make a business attractive for sale at the best price, “the owner’s role has to be relatively easy to transfer, ” says Michael Lefkowitz, author of the exit planning book “Where’s the Exit.” “Before you make your exit, you have to take some time to step away from daily operations, polish the appeal of your brand, update your books, and build up the capability of your subordinates,” Lefkowitz says. In short, you have to become replaceable.
Gibbons notes that “not every buyer with cash in hand is the right buyer for your company.” Three key variables must be addressed when looking to find the right buyer: consider your successor, explore your broker options and find a pre-qualified buyer.
In the end, working with a business broker is the fastest and easiest way to check off all three boxes. An experienced professional knows the importance of working exclusively with serious, pre-qualified buyers. Since a good business broker only works with serious buyers, that means business brokers can greatly expedite the process of selling your business.
“Assuming you choose wisely, this person will know how to craft a unique and compelling narrative about your business to inspire people to pony up the necessary dough—all the while helping you navigate the emotional ups and downs that accompany the selling process,” says James Moran, founder and managing partner of ValueStreet Equity Partners, a San Diego-based small business investment firm.
Those looking to get their business sold and reduce an array of potential headaches along the way, will find that there is no replacement for a good business broker.
A Closer Look at 3 Major Factors to Consider When You Buy a Business
The simple but undeniable fact is buying a business is one of the single greatest financial decisions a person can make. Buying a business can lead to great financial success or great financial failure. This fact helps to underscore why it is so important to work with an experienced broker who can help guide you through the often labyrinthian process of buying a business.
In a July 2019 article from Smallbusiness.co.uk, author Kyle Carins explores three key factors that everyone should consider before they buy a business. The first factor covered in Carins’ article, “3 Things to Consider When Buying a Business,” is appeal vs. viability.
Appeal Vs. Viability
Not surprising, the most important variable for most prospective owners is that the business is indeed viable. Not being able to differentiate between an appealing business and one that is viable can lead to financial disaster.
As Carins points out, “Do you want to make money or do you want to fulfill a dream?” Sometimes those two variables can intersect, but not always and not often. In the end, it is vital to know whether a given business is, in fact, potentially lucrative.
However, as Carins points out, it is also important that you choose a business that you will enjoy. Nothing can be more spirit crushing than running a business that you truly hate, even if it is lucrative. Selecting the right business for you is something of a balancing act that must take in a variety of often competing variables.
Considering Hidden Costs
The second factor that Carins looks at is the issue of “hidden costs.” One of the key reasons that it is so important to work with a business broker is that a business broker understands these kinds of factors that you might otherwise overlook. Due diligence is amazingly important. For those who have never bought a business before, working with a business broker offers substantial protection against making a potentially serious mistake.
Second Opinions
The third factor examined in Carins article is “Getting a second opinion.” For Carins, getting a second opinion is actually linked to due diligence. He feels that additional opinions regarding a given business should go beyond working with professionals and should also include talking to friends and family who know you well. Additional opinions can help one see angles that might otherwise be missed.
Again, buying a business is complicated and will take up a good deal of one’s time and mental energy. Your friends and relatives, understand your personality and your wants and desires. Their input can be particularly beneficial.
Finding an experienced business broker can help you do more than simply establish whether or not a given business is a “good deal.” Brokers with years of proven experience can also help you determine whether or not a specific business is a good fit for you and your lifestyle.
Obtaining a Fair Market Value for Your Business
Fair market value can be used as a way for business owners to “bridge the gap between the valuation they feel they deserve and that which they’re likely to receive.” In an October 2018 Divestopedia article, Dave Kauppi says this increases the chances of a deal actually taking place. Let’s turn our attention to some of the key points in Kauppi’s informative article.
Understanding the Reality of Selling a Business
Few businesses actually sell on their first attempt. Just 10% of businesses that are for sale are actually sold three years later, according to the article. This low percentage underscores the value of working with a business broker. Selling a business can be difficult under even the best of circumstances. The process is complex, and most sellers have never actually sold a business before.
Business owners should have realistic expectations regarding valuation. The market doesn’t care “how much money you need for retirement,” or how much you’ve invested.
Four Points to Consider
Business owners should understand the few business characteristics that will ultimately drive the sale. The four key factors to consider: contractually recurring revenue, durable competitive advantage, growth rate and customer concentration.
There is a lot packed into these four points, but here are a couple of big takeaways. In terms of customer growth, if a large percentage of your business is derived from a single customer, then that is going to be seen as a problem. As Divestopedia points out, if your company is dependent and partially dependent on a single customer, then you can expect a lot of pressure for you, as the business owner, to stick around a lot longer to ensure that this key customer isn’t lost. If intellectual property, such as software, is involved, then things can get even more complex. In the end, determining value in technology-based companies can be more challenging.
In the end, working with a seasoned business broker, one that understands valuation and how best to get there, is a must. You want to receive the best possible price for your business. An experienced business broker will help you understand how to navigate the complex process of determining a price. However, and most importantly, a business broker will help you achieve a fair market value, so that your business doesn’t remain unsold for years.
Copyright: Business Brokerage Press, Inc.
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Read MoreDealing with Inexperience Can Ruin the Deal
The 65-year old owner of a multi-location retail operation doing $30 million in annual sales decided to retire. He interviewed a highly recommended intermediary and was impressed. However, he had a nephew who had just received his MBA and who told his uncle that he could handle the sale and save him some money. He would do it for half of what the intermediary said his fee would be – so the uncle decided to use his nephew. Now, his nephew was a nice young man, educated at one of the top business schools, but he had never been involved in a middle market deal. He had read a lot of case studies and was confident that he could “do the deal.”
Inexperience # 1 – The owner and the nephew agreed not to bring the CFO into the picture, nor execute a “stay” agreement. The nephew felt he could handle the financial details. Neither one of them realized that a potential purchaser would expect to meet with the CFO when it came to the finances of the business, and certainly would expect the CFO to be involved in the due diligence process.
Inexperience # 2 – It never occurred to the owner or his nephew that revealing just the name of the company to prospective buyers would send competitors and only mildly interested prospects to the various locations. There was no mention of Confidentiality Agreements. Since the owner was not in a big hurry, there were no time limits set for offers or even term sheets. It would only be a matter of time before the word that the business was on the market would be out.
Inexperience # 3 – The owner wanted to spend some time with each prospective purchaser. Confidentiality didn’t seem to be an issue. There was no screening process, no interview by the nephew.
Inexperience # 4 – The nephew prepared what was supposed to be an Offering Memorandum. He threw some financials together that had not been audited, which included a missing $500,000 that the owner took and forgot to inform his nephew about. This obviously impacted the numbers. There were no projections, no ratios, etc. This lack of information would most likely result in lower offers or bids or just plain lack of buyer interest. In addition, the mention of a pending lawsuit that could influence the sale was hidden in the Memorandum.
Inexperience # 5 – The owner and nephew both decided that their company attorney could handle the details of a sale if it ever got that far. Unfortunately, although competent, the attorney had never been involved in a business sale transaction, especially one in the $15 million range.
Results — The seller was placing almost his entire net worth in the hands of his nephew and an attorney who had no experience in putting transactions together. The owner decided to call most of the shots without any advice from an experienced deal-maker. Any one of these “inexperiences” could not only “blow” a sale, but also create the possibility of a leak. The discovery that the company was for sale could be catastrophic, whether discovered by the competition, an employee, a major customer or a supplier .
The facts in the above story are true!
The moral of the story – Nephews are wonderful, but inexperience is fraught with danger. When considering the sale of a major asset, it is foolhardy not to employ experienced, knowledgeable professionals. A professional intermediary is a necessity, as is an experienced transaction attorney.