In this economic environment, buyers are going to be skeptical about whether a business can maintain the same level of revenues and cash flows going forward. That plays out in their offering a lower price for a given business than they might have offered in better times.
San Francisco, CA (PRWEB) January 7, 2009
BizBuySell.com, the Internet's largest marketplace for buying or selling a small business, today released economic data that suggests the business-for-sale market is suffering in the down economy.
According to BizBuySell.com's Fourth Quarter Insights Report, the number of closed transactions reported to BizBuySell.com in the Fourth Quarter 2008 dropped 20% as compared with the same time period in 2007 - from 1,541 transactions to 1,232. Closed transactions are reported to BizBuySell.com by business brokers nationwide.
"Clearly, the market faces a number of hurdles right now that make it more difficult to get deals done," says Mike Handelsman, general manager of BizBuySell.com. "There is still a lot of activity and many deals are getting done, but there has definitely been a slowdown relative to what we saw last year."
-- Popular Business Valuation Metrics Are Down --
In addition to fewer completed deals, BizBuySell.com notes a decline in the metrics that are used to value companies. Compared to the same quarter last year, both revenue multiples and cash flow multiples have declined.
Revenue multiples on reported closed transactions dropped from 0.687 to 0.685 year over year, representing a 0.3% decline. Similarly, cash flow multiples dropped from 2.80 to 2.68, representing a 4.5% decline. The revenue and cash flow multiples are calculated by dividing the selling price of the business by its reported annual revenue or cash flow.
"Declining valuation multiples imply that there is considerable uncertainty about future revenue and cash flows for small businesses," notes Handelsman. "In this economic environment, buyers are going to be skeptical about whether a business can maintain the same level of revenues and cash flows going forward. That plays out in their offering a lower price for a given business than they might have offered in better times."
The median sales price for closed transactions also declined year over year, from $187,700 to $177,500.
BizBuySell.com believes that limited access to capital is also playing a role in dropping sales prices. There are simply few buyers who have capital to buy a business, and fewer opportunities for potential buyers to get access to traditional sources of capital such as SBA-backed small business loans. As such, fewer buyers are available to bid on a business and there is limited upward pricing pressure.
-- Key Takeaways for Would-Be Business Buyers or Sellers --
The current market presents a unique set of opportunities and considerations for business buyers and sellers. BizBuySell.com says buyers and sellers should take note of the following market phenomena:
- Cash Is King. If you have access to cash, it could be a good time to buy. Buyers with cash may be able to find some great deals right now and will receive a warm welcome from sellers. Buyers should not only have cash to buy a business; buyers should have a cash cushion to weather potential business challenges or losses for some time, given that some economists don't project an economic turnaround until 2010.
- Caveat Emptor. Let the buyer beware. This is a risky time to buy. A business that is doing fine now may end up struggling in the months to come due to economic circumstances. Buyers need to have a very current view of a business's performance in these challenging economic times, and must assess that risk and factor it into their asking prices.
- Hire Good Due Diligence Consultants. Given the risky nature of the current market, it's more important than ever to understand exactly what you are buying. BizBuySell.com recommends that buyers engage trained professionals (e.g. a business broker, accounting firm or due diligence consultancy) to help them assess the business before signing a purchase agreement.
- Seller Financing May Close The Deal. Given the ongoing credit crunch, sellers may need to offer seller financing to get a deal done. Buyers will be pleased to see that sellers have enough confidence in the business to finance the sale. As a result, sellers who can provide financing as part of their sale agreement may be able to get a higher price for their business.
- Waiting to Sell Could Be a Mistake. Some sellers have taken their companies off the market, waiting for a better time to sell. However, given that uncertainty in the market may be even greater than many buyers realize, it may still be a good time to sell. Sellers should be realistic about whether they will get a better price in the future, even if they now wish that they had sold out before the market downturn.
The BizBuySell.com Fourth Quarter Insights Report includes business-for-sale metrics for the nation and for more than 70 metropolitan areas. Metrics are also available by industry and business type. The current Insights Report comprises data from 1,232 closed transactions and more than 38,000 active listings.
For more information on the BizBuySell.com Fourth Quarter Insights Report, visit http://www.bizbuysell.com/news/media_insight.html.
BizBuySell.com is the Internet's largest and most heavily trafficked business for sale marketplace, with more business for sale listings, more unique users, and more search activity than any other service. BizBuySell.com currently has an inventory of over 50,000 businesses for sale, and more than 715,000 monthly visits. BizBuySell.com also has one of the largest databases of sale comparables for recently sold businesses and one of the industry's leading franchise directories.
BizBuySell.com was founded in 1996 by Computer Projects Inc. In 2004, LoopNet, Inc. acquired BizBuySell.com. LoopNet operates the largest commercial real estate listing service online, with more than $535 billion of property listed for sale and 4.9 billion square feet of space for lease. With over 3 million members, LoopNet attracts the Internet's largest community of commercial real estate professionals.