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With the Economy Improving… Should You Consider Buying a Small Business?

There have been recent reports as of late to suggest that the improvement we’re witnessing with the economy is for real and that GDP growth should resume in the short term in both the US and Canada.  In fact, many leading economists are calling for economic growth to turn positive in the 3rd quarter of 2009. 

What does this mean to people who are looking to buy a business?  A lot. 

Qualified business buyers have been holding back

There are a large number of business buyers in the US and Canada that have held off on buying a business due to the instability in the market.  These are business buyers who are qualified, skilled and have the liquid capital that is required to complete a business sale transaction.  The people have held back mainly due to the uncertainty in the economy.  Now that the “Great Recession” is drawing to a close, business brokers are finding that their phones are ringing with more buyer inquiries looking for good businesses for sale.

There is a sense in the market now that there is pent up demand on the part of buyers who think that the timing may be right to buy a business now.  If you are thinking of buying a business within the next few months, be prepared that you may be in for some competition from buyers who are now ready to buy, now that the economic mood is so much better.  You may also find that there may be some great bargains to be had, as long as you’re ok with the risks.

Will it be a seller’s market or a buyer’s market?

Although business buyers are returning to the marketplace to look for businesses for sale, the question remains…. “what will they find”? 

Business sellers are also returning

Many small and mid-sized businesses have gone through very hard times over the past 12 months and it is not uncommon for a small business owner to post revenue losses of 30-50% less than “normal”.  Because of this, many business owners have held off on selling a business, thinking that the value they would receive if they sold their business now would be less than ideal.  Now that the economy is showing “glimmers of hope” many business owners are deciding that they cannot wait any longer and that now is the right time to sell. 

Is now really a better time to sell a business? 

Yes, but compromises must be made.

Now that the sense of economic ‘despair’ is diminishing, many business sellers are deciding that the timing may now be better to sell a business.  The only wrinkle with that reasoning is that business sellers will need to convince a buyer that their business is still worth the money (or close to it) that it was before the recession and that the business is truly improving. 

In other words, if an otherwise good business were looking to sell, but suffered a decrease in revenue & profitability during the recession – what would be a fair basis to value the business on?  Would it be fair to value the business solely on weak 2009 results, now that the economy is on the upswing?  Would it be fair to value the business on pre-recession results even though profitability has clearly suffered over the past year? 

The truth is that anyone looking to sell a business in the next few months that has posted uncharacteristic drops in revenue during the recession will probably need to come to some sort of a compromise with a business buyer.  The business must show that results will improve and that the business still has potential going forward. 

As a business buyer, there will be some potentially great bargains to be had in looking for a business for sale.  If you are ok with buying a business that had results drop during the recession but has an excellent track record and clear growth prospects, you may find yourself an excellent value.  Work with a business broker who is familiar with your market to learn about the different options available to you.