Valuing and selling a California business in September 2020
Andrew Rogerson
in Business valuations, Management and Planning, Selling your business
The California economy, like the US economy and the rest of the world, is still reacting to COVID-19 and its effects.
Adding to the mix, in California, we are experiencing a very hot and dry summer with over 350 wildfires raging throughout the state.
Also adding to the mix is AB5 or the new independent contractors’ law and the effect it is having on businesses with both Uber and Lyft threatening to leave the State of California until voters cast their ballot in the upcoming election in November.
How does all this affect valuing and selling a California business in September 2020?
Essential versus Non-Essential businesses
What does all this mean if you own and operate a business in California?
The main dividing line appears to be whether your business has a chance of surviving if it is an Essential business and whether you received either an SBA EIDL or PPP loan. If you received either loan, it was successful in providing a lifeline to not only the business owner but also its employees.
What is happening in the economy?
Each quarter since 2012, two of the associations I am a member of, the IBBA and M&A Source conduct the Market Pulse Survey in conjunction with Pepperdine University.
The second-quarter survey of 2020 was conducted from July 01 to 15, 2020, and was completed by 361 business brokers and M&A Advisors. There were 176 transactions completed this quarter.
The report is over 100 pages and if you would like a copy, simply send me an email to info@rogersonbusinessservices.com
Closing the sale of a business on time versus not closing on time.
The highlights from the Market Pulse report include:
- Businesses with a sale price of less than $2 million were experiencing:
- A delay of 36% of the transactions due to COVID-19.
- 16% were canceled and
- 40% were unaffected.
- This means only 8% of transactions were not disrupted.
- By contrast, only 11% of deals were canceled in the first quarter of 2020.
- Businesses with a sale price between $2 million and $50 million were experiencing:
- A delay of 37% of the transactions due to COVD-19.
- 10% were canceled and
- 41% were unaffected.
- This means only 12% of transactions were not disrupted.
Market sentiment drops to record low
The Market Pulse survey first started in 2012. As you would expect, this is the first time in Market Pulse history that seller-market sentiment has dropped below 50%,
By way of comparison, previous lows based on deal transaction value were as follows:
- Less than $500,000: Q3 2014 at 22%
- $500,000 to $1MM: Q3 2013 at 36%
- $1MM to $2MM: Q1 2014 at 42%
- $2MM to $5MM: Q2 2014 at 51%
- $5MM to $50MM: Q3 204 at 63%
Above is a graphic comparing Q1 versus Q2 2020 Seller Market Sentiment
Median Price Paid versus Asking Price Q2 2019 – 2020
In Q2, median final selling prices came in anywhere from 89% to 100% of the pre-set asking price or internal benchmark. Lower middle-market companies in the $5 million to $50 million range achieved the highest values at 100% of the benchmark.
Above is a graphic comparing the Media Price Asked versus Asking Price for Q1 V Q2 2020
Why business owners are selling
Retirement led as the number one reason to sell across all sectors. In the $5MM-$50MM sector, 20% of sellers were triggered by an unsolicited offer – indicating an active buyer pool exists in this sector.
Above is a graphic showing the top two reasons behind a seller’s decision to sell their business.
Know your buyer
One of the most important values I add when assisting the owners of a business to value and sell their business is the knowledge and approach I use to find the right buyer.
There are different buyers with different motivations, financial abilities, management, and ownership ability. It is critical to be aware of these differences to avoid wasting time, or more importantly, sharing information with a buyer lacking the qualification and so they may come back and damage the business.
Asking Price versus buyers
Here is a summary of the Asking Price for the business and the typical type of buyer in that price range for the business.
Asking Price less than $500,000:
Buyers in this sector tend to be:
- First-time buyers (45%), serial entrepreneurs (30%), or existing companies (20%).
- Motivation is to buy a job (47%) or add a horizontal add-on (25%).
- Location within 20 miles (72%) or more than 100 miles (16%) of the seller’s location.
Asking Price between $500K-$1MM:
Buyers in this sector tend to be:
- First-time buyers (42%), existing companies (29%), or serial entrepreneurs (29%).
- Motivation is to buy a job (44%) or add a horizontal add-on (31%).
- Location within 20 miles (41%) or within 50 miles (30%) of the seller’s location.
Asking Price between $1MM-$2MM:
Buyers in this sector tend to be:
- First-time buyers (40%) or serial entrepreneurs (33%).
- Motivation is to buy a job (43%) or get a better Return On Investment than other investments (27%).
- Location within 20 miles (42%), within 50 miles (26%), or more than 100 miles (26%) of the seller’s location.
Asking Price between $2MM-$5MM:
Buyers in this sector tend to be:
- First-time buyers (40%) or serial entrepreneurs (27%).
- Motivation is to buy a job (27%).
- Location within 20 miles (47%), within 50 miles (20%), or 100 miles (20%) of the seller’s location.
Asking Price between $5MM-$50MM:
Buyers in this sector tend to be:
- Private Equity firms seeking a platform acquisition (40%), Private Equity firms seeking an add-on acquisition (27%), or existing companies (13%).
- Motivated to acquire a horizontal acquisition (33%) or a vertical acquisition (33%).
- Location more than 100 miles (67%) of the seller’s location 44%.
How does all this affect valuing and selling a California business in September 2020?
Good business decisions are about researching and asking the right questions to arrive at a set of data points.
If you are thinking of buying a business because it will bring job security, interest rates have never been lower and there are business owners with a motivation to sell their business, you are right.
If you are a business owner and think it is time to sell your business, you are right. Good business decisions have allowed you to get to this point with the owning and operating of your business.
Use the skills you have used and honed to make the decision that makes the most sense to you. Why does anything differently?
Do not forget we are heading into a Presidential election. Historically this means a slowing economy as there may be changes to tax and related laws that affect different businesses in different industries such as healthcare. Again, as we are in California, be aware of voters’ opinions about AB5, a budget deficit, and more.
Where to from here?
If the time is right to value and sell your California business, look for someone you can trust to assist with your most important asset.
What is critical is what is important to the business owner or owners. If the time is right to value and sell the business that is as complicated as it should be.
An accurate business valuation is the first step to successfully selling a business.
There are many steps to successfully selling a business. Here is a summary of the Twenty Four steps it typically takes.
If you would like more detail, this is a more comprehensive explanation about selling a business.
If you still have questions about valuing or selling your California business, you are welcome to schedule a 30-minute conversation with me. Simply click this link to schedule a call with me and find a date and time that works for you. The rest happens automatically.
