It's all about supply and demand.

Potential buyers and sources of capital for the acquisition of profitable privately-held companies is plentiful while the supply of businesses on the market is not. This makes a profitable, established business a hot commodity and in demand. Inc. Magazine spells it out in this month's issue, "The Most Valuable Businesses in America."

During my first conversation with Darren Dahl in February, in preparation for his writing the article for Inc. Magazine, he wanted to understand what drives the value of a business and why some businesses are more desirable than others.

I first described the Houston marketplace, which enjoys one of the top economies in the nation. Location, location, location is always a value driver, and a business location is no exception. I've been writing about Houston's hot economic climate for over a year now and told Mr. Dahl that Houston is a "bulls eye" target for business acquisitions because of it. We cannot satiate the marketplace of buyers because there are not enough businesses currently for sale.

Good businesses are in short supply. The number of buyers looking to buy a business far exceeds the number of businesses available. So when a new business hits the market it will usually sell very quickly if the owner's expectations are realistic, if their financial history and data are upward trending and in good order, and is marketed properly.

We have buyers waiting for businesses such as these and are ready to act quickly when one comes along. They know that if they don't pull the trigger, they will miss out to someone else who will.

One of our "Serial Entrepreneurs," as described in Inc.'s article, agreed to a conference call with myself and Mr. Dahl, and pretty much described what makes him tick and what he looks for and why. Entrepreneur Gary has been working with Don Piercy, one of our staff of professional brokers, for several years and has four businesses in his collection and is currently in the process of acquiring his fifth. We thank Gary for taking time out from his very busy schedule to share his viewpoints.

In continuing the issues surrounding value, while a price tag can certainly be put on any item for sale, including a business, price doesn't mean value. Value is in the eye of the consumer. It is the perceived benefits that the business represents to the market of buyers that makes it valuable. Perceived benefit, or value, looks different depending on who's looking. And, ultimately, the price that will actually be paid will be determined depending on how MANY are looking. Which means if lookers are plentiful, demand is high. The price will reflect that demand.

I further explained that while the reasons that business owners of small privately-held enterprises sell do not vary significantly, the reasons for buying do. I described the various categories of buyers and their respective acquisition criteria and told Mr. Dahl that the price each type of buyer is willing to pay directly correlates to their motive for the acquisition. This is why it is important for business owners to know who the most likely buyer would be for their company prior to going to market.

It was then that Mr. Dahl decided to focus part of his article on the buyers rather than just the attributes of the business. Inc. Magazine's article covers the U.S. market as a whole and does not describe all buyer types. But it definitely describes the current Seller's Market that exists for profitable businesses for sale today.

In closing and of particular relevance, is that 8,000 Americans are turning 60 every day, which means about 20% of businesses owned by boomers will be on the market within the next couple of years. About 65% to 75% will be exiting within a decade, which means we will experience what is expected to be the greatest wave of business transfer activity in U.S. history. The future large-scale baby boomer exit will make for a buyer's market for businesses rather than the seller's market that exists today.

Not only is this important for those owners of small businesses who are considering their exit, it is essential to the economic vitality of our country that these firms successfully transfer to new ownership. The estimated 25.8 million small businesses in the United States have a huge impact on our economy. Outlined below are powerful statistics that speak to the importance of the continuity of these enterprises. Small businesses --
  • Have generated 60 to 80 percent of net new jobs annually over the last decade
  • Employ 50.6 percent of the country’s private sector workforce
  • Represent 97 percent of all the exporters of goods
  • Represent 99.7 percent of all employer firms
  • Generate a majority of the innovations that come from United States companies

Source: U.S. Small Business Administration
Read Inc. Magazine's Full Article