In the article Market for small businesses appears waning, survey says by Joyce Rosenburg, published in the Washington Post, she reports that:
That's the finding of a quarterly survey of brokers and advisers who help owners and buyers complete sales of small and mid-size businesses. The survey found that owner shopping to sell their companies are less optimistic about a sale than they were a year ago. The survey found the drop in its measure of optimism was particularly notable among owners of businesses in the $1 million to $2 million range; it fell 6 percentage points from a year earlier.
Like every market, the small business market is cyclical. Just like you wouldn't try to sell your house after the 2nd house in the neighborhood got less than their asking price. The same is true with your business. If you don't have to sell your business, the best strategy is to hold onto it during this business market cooling cycle.
To re-use the analogy to the housing market, now is the time to invest in renovations that will make the house more valuable when the market eventually turns. How do you do that?
In a previous post, 5 Proven Methods for Accelerating Small Business Growth, we covered several hacks you can deploy to help keep your business moving forward.
While a cooling business market may not be great news to some, it can be a great time for those who can invest in their business. Why? In a cooling market, buyers are looking for bargains. If your business is in good shape, it would be better to invest than sell in a down market.
Let's use an example. For instance, small business A has an annual revenue of $500,000. In a normal market, Business A might find a buyer willing to pay 1.5 x revenue, or in this case $750,000. So, Business A would make a net profit of $250,000 for that sale.
Now, let's look at Business A in a cooling small business market. Multiples are much lower. In this market, Business A might be able to find a buyer willing to pay only 1.2 x revenue, or $600,000. In this case, Business A would make a net profit of $100,000.
Instead, let's say Business A invests that $100,000 in improvements, either by getting a loan or reinvesting profits. For the sake of the example, let's say Business A makes a net return on those improvements of 10%. Then, the $100,000 invested in improvements are now worth $110,000 in revenue.
So, now, the market returns to normal. Business A has $610,000 in revenue. At a normal multiple, Business A sells for $915,000. This yields a profit of $305,000, which is more than 2 times as much. Therefore, you can see the benefit of investing during the cooling small business market versus selling.
For instance, a cooling small business market might suggest more sluggish economic times ahead. However, it doesn't mean stop investing. Smart investing now can have you poised to reap the rewards when inevitably the market returns to normal.
If you have any questions or concerns about what your business can do during a cooling small business market, you just have to contact us for help.
Brian Cairns, CEO of Prostrategix Consulting. Over 25 years of business experience as a corporate executive, entrepreneur, and small business owner. For more information, please visit my LinkedIn profile