The news about business sales always mentions that Baby Boomers who are hitting retirement age are behind the big numbers we’re seeing currently. Back in February we reported that 2014 was a record-breaking year for small business sales, and the news about this market continues in this vein: the number of businesses currently for sale is currently at its highest number since 2009. If you’re one of the 76 million Boomers out there, you’re probably beginning to at least think about retirement, and if you’re one of the 12 million Boomers running a small business, you’re probably wondering when would be the best time to sell.
There are many factors that determine what exactly makes a “good time to sell.” Some of these are entirely beyond a business owner’s control – the number of businesses on the market at any given time, for instance. Everyone fears a glut because oversupply leads to lower sale prices based on the law of supply and demand, but the fact is there will never be a time when all 12 million Boomer business owners put their companies on the market at once.
According to Calder Capital founder Max Friar, now is indeed a great time to sell for three reasons:
- “Profits are generally back up to or past 2008 levels, thus boosting valuations. There is a misconception that multiples are higher now than in the past. This is generally not true. Profits are higher, however, generally, most small businesses with cash flows less than $500K are going to have a difficult time achieving higher than a 4x multiple of cash flow, especially if the owner is actively managing the business day to day.
- “Cash balances are high and banks are eager to lend to creditworthy buyers. This combination is allowing the market to be open to many more buyers than 3-5 years ago. After the financial crisis buyers and banks were afraid to take risks and closed their wallets and access to credit, respectively. That has largely gone by the wayside.
- “If one has capital to deploy, there are few places to get returns consistently above 15-20%. Not many investors are interested in bank CDs, international investments, bonds, or even energy or real estate reits, and it seems increasingly that U.S. equities are losing the smoking appeal they’ve had since 2009. Because of this, a small business with an EBITDA margin of 20% suddenly becomes extremely appealing.”
People will make decisions based on their personal inclinations and situations, and businesses will very likely come on and off the market at a reasonable rate. Some of them will sell because the owners will have carefully prepared for this stage, decreasing owner dependence and making sure that all assets are in good shape.
Other businesses will sit on the market, languishing, because they are overpriced or owner dependent or because their owners have unrealistic expectations about their desirability. The sad truth is that the majority of Boomer business owners (up to 75%) haven’t got an exit strategy in mind for their retirement. In many of these cases, the owners will simply close their businesses when they do not sell. However, by making a few strategic changes now, these people could ensure a much more successful outcome.
For Baby Boomers who have already done the right prep work, though, now is a great time to sell.
If you are a business owner who is either looking to sell or exploring the idea of selling your business in the future, contact Max Friar for a free assessment and confidential discussion about how and when to best go about it.