Is 2014 a good time to sell a practice?
Is 2014 a good time to sell a practice?
Happy New Year and welcome to 2014!
January for me is the best month being the owner of a business. It’s when I get to slow down a fraction and look back at the year from a business perspective and decide what was good, what I can learn from the past year and most importantly, how I see the coming year and what plans and changes I need to put in place to make it successful.
2013 was an awesome business year for me and I hope it was for you. There is no question the US economy is improving albeit slowly. The banks are now more willing to lend so this puts more people into business and therefore provides more jobs all which helps the economy grow. California appears to have its budget deficits under control or perhaps the media are no longer talking about it and so that allows us to think the problem is going away.
Internationally the different global markets are also getting stronger. The European countries and their economies are coming out of their recession, most of the Asian economies are growing again although the main South American economies of Brazil and Argentina are struggling.
So is it a good or a bad time to own a business? The answer will depend on how well your business is doing and that will depend on what industry you are in. Most sectors are growing and starting to heal. The construction industry has been the slowest and most difficult of all industries since 2008 but green shoots are starting to appear.
Is it a good or a bad time to buy or buy a business That answer comes from a joint survey that’s put together by two associations I’m part of called the International Business Brokers Association and M&A Source and also the Graziadio School of Business and Management that is part of Pepperdine University.
Here are a few highlights or key findings.
There were 192 respondents from 38 states.
The survey looked at the following two market segments:
|Main Street (Business selling price)||Lower Middle Market (Business selling price)|
|Less than $500,000||$2 million to $5 million|
|$500,000 to $1 million||$5 million to $50 million|
|$1 million to $2 million|
Buyer or seller’s market
- If the business was selling for a price less than $500,000 then 72% thought it was a buyer’s market, that is, it was hard to sell the business.
- If the business was selling for a price between $500,000 and $1 million then 64% thought it was a buyer’s market.
- If the business was selling for a price between $1 million and $2 million then 57% thought it was a buyer’s market.
- If the business was selling for a price between $2 million and $5 million then 40% thought it was a buyer’s market.
- If the business was selling for a price between $5 million and $50 million then 21% thought it was a buyer’s market.
What’s driving the decision to sell?
The number one reason that business owners were choosing to put their business on the market was because of retirement. The Baby Boomers have decided that they no longer wish to wait and it’s time to sell.
Over half the respondents said they expect more businesses to come onto the market, that is, the inventory of businesses for sale will only increase.
What’s driving the decision to buy?
The number one reason to buy a business for Main Street buyers was that it gave them job security and control of their destiny.
For Lower Middle market buyers, their number one reason was their belief they would get the best return on their investment.
As the table below shows, the higher the selling price of the business the higher multiple a buyer is willing to pay.
|Main Street||SDE *||EBITDA *|
|Less than $500,000||2.0|
|$500,000 to $1 million||2.75|
|$1 million to $2 million||3.0|
|Lower Middle Market|
|$2 million to $5 million||4.3|
|$5 million to $50 million||5.8|
- SDE = Sellers Discretionary Earnings
*EBITDA = Earnings Before Interest Taxes and Amortization
Time to close
The table below tells the story. The larger the business the longer it takes to close.
In addition, I’ll add a personal comment. I’m part of two national business brokerages. Both are seeing longer sales times in California and the reason this is happening is because the housing market is taking longer to resolve.
|Less than $500,000||4 months|
|$500,000 to $1 million||5 months|
|$1 million to $2 million||7 months|
|Lower Middle Market|
|$2 million to $5 million||7 months|
|$5 million to $50 million||10 months|
Mistakes and terminations
The primary reason for a business not being able to sell is unrealistic expectations. This includes not only unreasonable expectations about the selling price or value of the business but buyers and/or sellers making requests or demands the other party are unwilling to meet. The percentage increased over previous surveys, that is, as the economy gets better then so too did the requests and expectations they would be met, for example, the seller expecting the buyer to bring all cash.
Other reasons deals failed to close include poor buyer preparation and personality conflicts.
The businesses selling well on Main Street include personal services, restaurants, business services and consumer goods/retail. The healthcare industry was also active.
The businesses selling well in the Lower Middle Market include healthcare and healthcare related businesses followed by manufacturing and wholesale/distribution.
If you would like to look at the full 8 page report, please click the following link: http://www.rogersonbusinessservices.com/pdf/marketpulse_2013_Q3.pdf
If you are looking for a gift idea for a business owner or someone that wants to become a business owner then one of the books I’ve written may be what you are looking for. For the ‘next’ entrepreneur there is a choice of three books; ‘Successfully start your business’; ‘Successfully buy your business’ or ‘Successfully buy your franchise.’ The business owner that is thinking it’s time to sell would enjoy ‘Successfully sell your business.’ If you would like more information please visit my website Business Advice Books.