You have worked hard over the years to build a great business. You have increasing revenues, great profit margins, a diverse customer base, and now, you are ready to sell your San Diego business. You have done everything right to create as much value as possible in anticipation of selling your business. But what you didn’t know, and certainly couldn’t control, were these external factors, that can impact sale of your business….
Interest Rates. Most business buyers use debt to buy a business. Lenders require that the buyer/borrower can only use a certain portion of the free cash flow to service acquisition debt. When the Fed raises interest rates, the cost to borrow money increases, and thus the buyer’s monthly payment will increase. This impacts the amount a business buyer can borrow, and thus the price they can pay for a business.
Unemployment Rate. Low unemployment rates mean it’s harder for business owners to find employees, but also it impacts the desirability of businesses for sale that are small and owner/operated. Buyers are buying a business, but in the case of smaller main street types of businesses, they are also buying a job. When they can get a great job paying a lot of money and benefits, without spending capital, that impacts the desirability of lower income businesses.
Minimum Wage Rates or Union Contracts. For businesses utilizing entry level, student or part time workers, the impact of raising the minimum wage can hit their bottom line very quickly. And as their profits are reduced, the value of the business is also reduced. Maybe having a little less impact, but still impacting the bottom line, are organized labor contracts. Usually these are in bigger companies, and these types of companies usually can pass along some of the increased cost to their customer and future contracts. And in theory that should happen with smaller businesses, but there comes a point where the cost of that burger, coffee, or oil change reaches a point where there are alternatives to purchasing from that business.
Housing Market. In a rising market, homeowners feel like they have more equity in their home, and often they use their home equity to fund the down payment to buy a business. Conversely, in a falling market, buyers may not be able to obtain a HELOC loan to fund their down payment. The housing market also impacts business sellers as well. When home values are up, the retiring business owner who wants to sell their business, downsize, and move out of state, has plenty of equity to do so. But when the housing markets decline, the sale of the business owner’s residence might not generate what they had hoped. Many business owners are looking at the combination of a sale of a home as well as their business, to fund their retirement. When that goal cannot be achieved, they may decide to delay the sale of their business.
Elections. The closer we get to presidential elections, more often Buyers take a wait and see attitude. Maybe they are seeking an administration more business friendly, or maybe they fear their environmental service business might be impacted by a less eco-friendly administration. Conversely, Sellers might be motivated to sell if their preferred candidate doesn’t get elected, and they fear the new administration’s policy could impact either their business or their personal tax situation.
Public Health. We all witnessed the impact of Covid-19 on many if not most businesses. Until March of 2020, nobody would have given a thought as to how a business holds up during a health crisis. But now, with it fresh in everyone’s mind, it is now one of the factors involved in both business buyer and business seller decisions.
Vendor or Supply Chain Issues. If the business cannot obtain products, they have nothing to sell. Or if their supply is limited or delayed, both revenues and profits are impacted. Sometimes business owners work around this by ordering larger quantities and having more inventory. But that too has it downsides as inventory heavy businesses are harder to sell.
General Economic Conditions and Forecasts. Who wants to buy a luxury brands retailer when a recession is forecasted? Where will the buyer obtain their funds to buy a business, if regional or local banks are failing? Or in the case right after the beginning of the Great Recession, SBA lending all but ended for an extended period. Conversely, if the economic outlook is great, and we are forecasted to be at the beginning of a great economic expansion, then business buyers feel optimistic about buying a business.
The bottom line is, in good times and in bad, businesses will continue to sell. While business sellers, business buyers and business brokers cannot control these external factors, it’s always good to consider these when determining the timing of the sale of your business. And equally important, work with someone like Vanguard Resource Group who has sold hundreds of businesses, in good times and in bad!
