How is the California Economy Performing in 2019
Andrew Rogerson
in Business valuations, Management and Planning, Selling your business
The success or failure of a business can change dramatically with one simple event, and this has never been truer in the California economy.
As I write this article the wind is blowing harder than normal in Northern California. As a result, many PG&E customers are having their power cut to prevent the start of a power line induced spark that could start a large and uncontrollable bushfire.
Thankfully I live in an area managed by SMUD and it’s less of a concern.
If you own a business in a PG&E power area may mean you can lose your electricity and your business will quickly come to a standstill. This one simple action is hurting many businesses in Northern California especially if their business relies on Thanksgiving and Christmas sales including a manufacturing or construction business and have tight deadlines to meet.
How is the California economy performing in late 2019?
Last week I attended an event that River City Bank sponsors. The event is part of River City Bank’s Executive Forum and the topic was “Decision Making in an Uncertain Economic Environment”.
The event includes 4 speakers, and these were Mary Teichert from Teichert Construction, Kelly Brothers from Genovese Burford and Brothers, Noli Snobar from BFBA, LLP who are CPA’s and Steve Fleming from River City Bank.
The purpose of the event was to discuss what was happening in the current economy and, Northern California and the Sacramento area.
All four speakers agreed the California economy was doing very well and is expected to do well over the next few years. Construction industries were doing particularly well with lots of capital investments creating new buildings. Construction projects were particularly strong for distribution centers; a suggestion that retail will continue to be challenged by those buying on-line.
California recently introduced a new gas tax. This new gas tax is also stimulating the economy with new capital projects.
Locally in the Sacramento area, things were seen to be especially strong. Sacramento is to get its own soccer team, and this means building a new stadium near the old railyards downtown. As the cost of living continues to increase in the Bay area, technology jobs are moving to Sacramento due to its lower housing costs and attractive location of the twin rivers and Lake Tahoe and Yosemite not too far away. The marijuana industry is also becoming stronger.
Three negatives that were mentioned included Artificial Intelligence and how both business and society are not prepared well enough, a shortage of labor and related to the same issue, a shortage of qualified labor for specific industries as there has been a lack of focus on training the next generation.
What’s happening with the selling of businesses?
On a quarterly basis, BizBuySell surveys the market to see what is happening with the data from closed businesses for sale.
For the 3rd quarter of 2019, BizBuySell saw an 8.6% year over year decline.
The good news is that the number of businesses sold remains historically high but a concern that is now being seen is the impact on business sales due to businesses seeing an increase in costs that are passed onto the consumer and then lowers the amount the owner of the business gets to keep.
The data from the BizBuySell report shows that 37% of business owners experienced tariff-based cost increases with half of these business owners raising their prices to offset the higher costs. As a result of doing this, 46% of business owners saw a decrease in sales.
Should you sell your California business if you think tariffs will affect it?
This is a question I’ve received recently from several business owners that are thinking of selling. I think the simple answer is that it should not influence your decision too much. That is, make the decision whether to sell your business with what’s important to you; not whether you think the tariffs will affect your business.
Hopefully, the tariffs are a short-term solution to a complex problem. With the upcoming 2020 elections, politics may require that a solution is reached. What then happens in 2021 is anyone’s guess.
Some good news from the BizBuySell Insight report is that the median sale price of those businesses that sold held steady. As the graph below shows, 2019 2nd Quarter Median sale price was at its highest ever with 2019 3r Quarter not far behind.
What’s happening in Private Capital Markets?
Pepperdine University through the Graziadio School of Business and Management conducts a quarterly survey of Private Capital Markets. It presents its data in the Market Pulse Report.
The Market Pulse Report compares conditions for businesses being sold on Main Street (values of up to $2 million) to those being sold in the Lower Middle Market (values of $2 million to $50 million).
The 2nd Quarter 2019 survey has just been released and three data points show the following.
What percentage of businesses are selling?
Consistent with the previous analysis, 25% of businesses for sale were sold meaning 75% of businesses did not sell.
What are the primary reasons California businesses are not selling?
- The sale of 31% of businesses did not happen because of the value gap. That is, the seller had a value they were willing to accept, and the buyer had a value they were willing to pay but the difference was too much and so the sale of the business failed.
- The sale of 22% of businesses was unable to close because either the seller or the buyer was making an unreasonable demand.
- The sale of 10% of businesses did not happen because the cashflow the business was generating was insufficient to service debt and/or the money the buyer needed for it to be worth them making a purchase.
Are SBA loans being approved?
An important component for the sale of privately held businesses is a buyer getting access to finance to close the sale of the business.
The number one form of finance for a small business buyer is an SBA loan. The SBA office in Citrus Heights provides a report on the number of loans that are issued by all the SBA lenders in California.
As the table below shows, the good news is that for August 2019, there were a total of 107 loans approved for a 504 loan with a total loan value of $90,419,000. A 504 loan is to buy real estate. In addition, 559 loans were approved for 7A loans with a total value of $308,797,100.
The bad news, as the table below shows, the total number of 504 loans approved was 130 for total dollars of $122,753,000 for 504 loans while the total number of 7A loans was 672 and $345,781,900.
What is the value of your business?
Correctly valuing your business is a critical step to successfully selling your business.
Because valuing a business is so important, I’ve put together a program called “Value your business in 7 steps.”
Please click the following link to a page on my website that explains a little more about Valuing your business.
Valuing your business in 7 steps
The program that’s been put together covers 7 primary topics and includes an Excel file for you to use and work out a value for your business. The program also includes 7 PDFs of information so you can understand each of the 7 steps and how each step builds on the next step, so the final business value is accurate.
- Step 1 covers the 3 methods of valuing a business.
- Step 2 looks at the first valuation method called the Asset approach.
- Step 3 covers the topic of reviewing the business financial statements, so the business valuation is accurate.
- Step 4 discusses the second valuation method called the Market approach
- Step 5 review the third valuation method called the Income approach and one specific method.
- Step 6 looks at the Buyer Test Method which is a second Income approach.
- Step 7 brings it all together to arrive at the final value of the business.
Where do I sign up to learn more about how to value my business?
To learn more about how to value your business, enter your email address in this webpage: Valuing your business
You’ll receive the next few steps automatically.
