Should You Sell Your Business During a Recession?
One of the biggest questions a business owner might have at this time is, “Should I sell my business during a recession?” Unfortunately, this is not a simple question to answer. This depends a lot on your business, where you are located, the industry you are in, and the impact the pandemic and resulting economic fallout have had on your company.
Your Company’s Financial Health
So this is about your emergency funds and how much operational cash you had set aside for a rainy day. If you have sufficient working capital to survive a downturn this can enable you to not only weather a disaster but thrive during this time.
Even if your business is an “essential” one (more on that in a moment), a business that is in good financial health is much easier to sell than one that is strapped for cash. To illustrate that, before the historic Paycheck Protection Program, it was reported that the average restaurant had only enough working capital to survive a fifteen-day closure.
The same was true of a number of other businesses and households as well. If a business was deemed non-essential, without government help, bankruptcy seemed inevitable. It also meant that while some loans are forgivable, in many instances businesses that survive will do so further in debt.
This has a direct impact on whether you should sell your business or not.
Your Business Valuation and the Pandemic
Selling a business starts with a business valuation, and many business owners ask right away what impact the pandemic and a global recession will have on their business value. The answer, like the one of whether you should sell your business or not has a complex answer with many factors to consider.
This is due in part to the way your state responds to COVID-19 and the lockdown. In California, the state was one of the first to lockdown, and the governor left a lot up to each county as to what that looked like. There was guidance on what and was not considered an essential business.
So if your business provides a needed service and is considered essential, your business valuation could go up. This is especially true if your business is actually busier at this time and business may increase as a result. Those who manufacture cleaning products and hand sanitizers are a good example of this.
However, if your business is considered non-essential and has been closed, your business valuation may not be affected, as business will resume again once you are allowed to open. However, depending on how long your business is closed and the long-term financial impact, your business valuation may go down. Be sure also to account for the change to your finances that any PPP or other loans you may have taken will impact your business.
Many businesses will find themselves somewhere in the middle. The pandemic may have some impact on your business, good or bad, but you may be able to remain open even if you do less business than normal. And that’s the operative word: normal. The more you can continue your operations as normal or as close to it as possible, the better.
This will enable you to recover faster and means your business value will not be impacted as much.
Financing for the Buyer
We talk a lot about finding a qualified buyer, and one of the primary requirements is that they either have the money to buy your business or the ability to get financing. But how does a recession affect that ability?
Well, right now the SBA will automatically cover the first six months of payments if a buyer purchases a business and it is funded by September 27, 2020. Even if that is not true by the time you read this, there are still programs to help the buyer of a business during a recession.
However, there are certain businesses that lenders may not be willing to fund, at least not at the moment. That includes restaurants, fitness centers, and some health and beauty businesses. For those businesses, you may have to wait until restrictions have been lifted for a while, and they are seen as viable again.
On the good side, interest rates are historically low, which means access to credit is much easier for qualified buyers. If your potential buyer wants to capitalize on this, though, they need to start the process as soon as possible. It takes time to get a loan approved, along with the other things involved with buying a business.
So realistically, there is no way to guarantee this, but there are some industries that will likely fare better than others. Since businesses have been affected pretty universally and globally, that means people will have less disposable income to spend for a while. Those businesses that survive may have to get creative and expand what they do.
On the flip side, businesses that do survive are likely a good investment, as they have been able to make it through one of the worst downturns in recent history. That means when your business makes it through, investors will see it as a good potential purchase.
Selling Now vs. Waiting
The answer to this now is the same as it ever was. It takes time to sell a business, so if you don’t see yourself still running your business two years from now, you need to start to plan your exit now. It takes 8-12 months for a business to sell at the best of times just because of the due diligence and other steps required.
That means you don’t know what things will look like at the end of that time. Your goal is to keep running your business like normal as much as possible until it sells no matter what is going on in the world. Also remember that no matter what is happening at the time, a business that is healthier financially is easier to sell.
Being a business owner can be challenging at the best of times. Whether you want to sell because making a recovery on your own can be challenging. Or you may want to sell because your business is thriving despite the recession.
You may have other, more normal reasons to sell, like retirement or a desire to move on to another industry. Just understand that now may be as good a time to sell as any other time, but that decision will be largely up to you.
The decision to sell a business is a personal one, and even more so during a recession. Have questions, or need help with a business valuation to inform your decision? Contact us today at Rogerson Business Services. We’re here to help, and we’d love to be your business broker whenever you are ready to sell your California business.
Check out this list of businesses Rogerson Business Services has sold before. We can help you sell your business, too!