The Effect of COVID-19 on Buyer Expectations and the Sale of Businesses
Stanford Business school released a study in June of 2020 where they surveyed several business brokers, experienced and new, in agencies and independent brokers, and located all across the country.
The study was not large enough to be definitive, but it did offer some interesting insight into the current market for selling your business. If you were thinking about exiting your business before the current crisis started, or you are still considering how to exit your business in the current climate, these insights might help you.
There were 116 survey responses, responders had a median of 10 years of experience, and were scattered across 39 of 50 states. Here are the highlights of the results, and what they might mean to you.
The Number of Transactions and the Sale of Businesses
Business brokers in general are closing fewer transactions, but not only that, but they also have fewer businesses for sale. In light of the current crisis, this is not a surprise, but it is important to note that similar percentages in certain areas show a clear trend.
First, no matter the experience level of the broker, close to 60% are conducting fewer transactions now than before the onset of the COVID-19 pandemic. Just under 55% of all brokers expect to conduct fewer transactions this year. Only 8.6% are performing more transactions. More about that number in a moment.
The fact that numbers are down is not a surprise. The fact that they are down regardless of the experience of the broker, even those who have endured recession challenges before, shows how unprecedented the effects of COVID-19 are, and how unpredictable the future impacts are.
Since we also don’t know how long it will be before we emerge fully into a recovery, it is also important to keep in mind that until we do, the market for selling a business will remain uncertain. Uncertainty isn’t always bad news, but it is something to take into consideration.
Buyer and Seller Expectations during COVID-19
What has happened to buyer price targets during this crisis? The study shows they have dropped between 10-30%. Essentially 63% of sellers have lowered their expectations by some margin.
Is that mirrored in the expectation of sellers? Not necessarily. Only 42% of sellers have lowered their price expectations for their businesses, and 37% have not changed their expectations at all. What does that mean? Well, for buyers and sellers, it means that a data-backed valuation is more important than ever. The business valuation must also take into account the potential long term effect the current crisis will have on various businesses. Those results will also vary by location, and this study did not have enough respondents from any one area to come to a valid conclusion about local impacts.
Generally speaking, it means that both buyers and sellers must evaluate why they have adjusted their expectations, and how they anticipate that affecting their ability to buy or sell a business.
As with many other areas, this emphasizes the importance of an experienced business broker in every single transaction, one who knows the market and can help both buyers and sellers understand the unique challenges each transaction brings.
Operating Income. Debt Financing, and the Sale of Businesses
What’s the driver behind the variances in valuations? While things may vary across several factors, the common issue seems to be operating income and debt financing. Even if businesses are not shut down, the likelihood is that in most cases, operating income has been negatively impacted.
What makes a difference is how debt is handled. Business owners must understand that PPP and other assistance funding was issued to them, and if not forgiven, these loans go with them should they sell the business.
If you are a buyer, and the seller wants you to take on these loans as part of the sale, you’ll need to seek professional legal counsel, consult an accountant, and talk with a business broker about that part of the negotiation of the deal.
Your Results May Vary
One of the most important takeaways from this study is what we don’t know. The study was not nearly extensive enough to show variations by geography or across industry sectors. It’s a sure bet that the greatest impact in the near term will be on restaurants, travel-related businesses, tourist-related concerns, and others.
However, another key factor is location. Restrictions will vary geographically as states decide what businesses can open, when, and where. The other impacts will at times be ancillary. The restaurant slowdown will impact restaurant suppliers, industrial equipment companies, food distribution, and the agricultural industry until a switch can be made to a more direct to consumer model.
No matter what the type of business, the likelihood of this broader impact is extremely common. There are other businesses that will thrive during this time though. Some industries, like janitorial supply companies, suppliers of PPE, delivery services and logistics companies, and retailers with a strong eCommerce platform may even increase in value as the habits of consumers evolve and change.
Unfortunately, as with many things at this time, this survey tells us more about what we don’t know than what we do know. If you are a buyer or a seller of a business, there are a few practical takeaways;
- Fewer businesses will be bought or sold this year.
- Prices will vary, but in most cases will be lower.
- Operating income, cashflow, and debt management will be even more critical to businesses going forward, and businesses that are healthy in these areas will be much more likely to sell.
- We have yet to understand the near and long term effect of COVID-19 on many businesses.
Because we live in unique times does not mean you can’t buy or sell a business. But it does mean, more than ever that you need a solid business valuation, the services of a Certified Business Broker, and an understanding that selling a business takes time, and the one constant we can count on for a while is market uncertainty.
Do you have questions? Do you need a business valuation, or are you ready to sell your California based business? Check out the industries we specialize in, and then contact us today. We’d love to be your business broker.
