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
This is about your emergency funds and the amount of operational cash you have set aside for a rainy day. If you have sufficient working capital to survive a downturn, it can enable you not only to weather a disaster but also to thrive during this time.
Even if your business is an “essential” one (more on that in a moment), a company that is in good financial health is much easier to sell than one that is strapped for cash. To illustrate this, it was reported that before the historic Paycheck Protection Program, the average restaurant had only enough working capital to survive a fifteen-day closure.
The same was true of several other businesses and households as well. If a company were deemed non-essential and lacked government help, bankruptcy seemed inevitable. It also meant that while some loans are forgivable, in many instance,s 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 begins with a business valuation, and many business owners immediately ask what impact the pandemic and a global recession will have on their business value. The answer, like that of whether to sell your business or not, is complex and involves 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 was and was not considered an essential business.
Therefore, if your business provides a necessary service and is deemed essential, its business valuation may increase. This is especially true if your business is 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 significantly affected, as business will resume once you are allowed to reopen. However, depending on how long your business is closed and the long-term financial impact, your business valuation may go down. Be sure to also account for the impact on your finances of any PPP or other loans you may have taken, as they will affect your business.
Many businesses will find themselves somewhere in the middle. The pandemic may have some impact on your business, whether positive or negative, but you may still be able to remain open even if you experience less business than usual. And that’s the operative word: normal. The more you can continue your operations as typically 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 often discuss finding a qualified Buyer, and one of the primary requirements is that they either have the necessary funds to purchase your business or the ability to secure financing. But how does a recession affect that ability?
Currently, 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 are lifted for a while and they are deemed viable again.
On the positive side, interest rates are historically low, making access to credit 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.
Recession-Proof Industries?
Realistically, it is unlikely to guarantee this, but specific industries are likely to 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 need to get creative and expand their offerings.
On the other hand, businesses that do survive are likely a good investment, as they have managed to navigate one of the worst downturns in recent history. That means that when your business succeeds, investors will view it as a good potential investment.
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 company two years from now, you should start planning your exit now. It takes 8-12 months for a company to sell at the best of times, simply due to 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 continue running your business as normally as possible until it sells, regardless of what’s happening in the world. Also, remember that irrespective of the circumstances at the time, a financially healthier business 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 a daunting task. Or you may want to sell because your business is thriving despite the recession.
You may have other, more conventional reasons to sell, such as retirement or a desire to transition to another industry. Please understand that now may be as good a time to sell as any other, but that decision will ultimately be up to you.
The decision to sell a business is a personal one, and this is especially true during a recession. Do you 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 also help you sell your business.
