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middle market business valuations

Is 2020 a Good Year to Sell a Business?

Before deciding whether or not to buy or sell a business in 2020, you should be aware that political fears are driving down business valuations. While there is no recession yet, the prospect of one is still on the horizon, and 53 percent of business brokers surveyed by the Market Pulse Report of Pepperdine Business School says it’s already driving down valuations. This national survey was completed by business brokers and M&A advisors with the intent of providing a valuable resource to business owners and their advisors.

The biggest concerns affecting business valuations are:

  • Talk of recession

  • The upcoming presidential election

  • Trade wars with China and Canada

  • The lending environment

  • Uncertainty in the energy markets


“The market doesn’t like uncertainty, particularly on Main Street,” said Craig Everett, PhD, director of the Pepperdine Private Capital Markets Project at the Pepperdine Graziadio Business School. “Small business owners are worried that a recession is coming, and trade issues are causing volatility. All that nervous energy means buyers are dialing back a bit— particularly on the smaller market deals.”

Why?

Because business confidence is the cornerstone of most Main Street transactions, and an election season always makes the situation less stable. 

But the biggest reason that businesses aren’t selling boils down to one concept: unrealistic expectations.

Unrealistic Expectations Hinder Business Sales


Business owners should look at the realistic market value of their business’ worth before entering into any deal or transaction. Top M&A advisors in the Market Pulse Report cited “unrealistic value expectations” as the main reasons Main Street (values $0-$2MM) and the lower middle market (values $2MM -$50MM) businesses aren’t selling. 


Other issues affecting the state of the market include:

  • Funding issues

  • Legal term disagreements

  • Downward trends

  • “Cold feet” on behalf of the buyer

  • Seller unable to emotionally “let go” 


“It’s pretty common to encounter a seller with grand value expectations. People can spend their whole lifetime building a business, and they’re really proud of what they’ve created,” said David Ryan, advisor with Upton Financial Group. “Unfortunately, when someone wants out of their business doesn’t always align with market realities. We try to educate and help sellers understand the gaps between their goal and what buyers will likely pay.”


This is reflected in the report’s study that noted 83 percent of business buyers and sellers in the less than $500,000 bracket had no formal planning before engagement. While lower middle market sellers were more prepared, still roughly 38 percent did not do any type of planning in advance. 


However, some businesses with a $5 million or more evaluation had more positive results. 


“Businesses with values of $5 million or more came in well above expectations in Q3,” said Jeff Snell, principal of Enlign Advisors. “While this sector typically comes in at or close to benchmark, it’s unusual to see results nine percentage points above target. Demand for lower middle market opportunities remains strong.”


The average time to close a business deal has experienced a slight downtick to an estimated 8.2 months. 


The Key to Selling? Understanding the Business Buyer Mindset


By understanding the demographics of each buyer in the monetary brackets, our middle market business brokers and merger and acquisition advisors can help leverage sales and acquisitions to provide positive results for buyers and sellers in Houston. The Market Pulse Report gave these examples:

  • First-time buyers in the <$500,000 sector represent 46 percent, while serial entrepreneurs ranked at 34 percent.
  • For <%500K to $1MM, 43 percent are first-time buyers, 30 percent have existing companies and 28 percent are serial entrepreneurs.
  • For $1MM to $2MM, first-time buyers make up 44 percent, serial entrepreneurs 26 percent and those with existing companies are 21 percent.
  • $2MM to $5MM have a composition of 47 percent first-time buyers and those with existing companies make up 41 percent.
  • $5MM to $50MM are 44 percent exiting companies and 44 percent private equity firms.

 



Savvy Houston Business Owners Are Keeping a Close Eye on the State of the Market


When you do decide to put your business up for sale, a few simple strategies can support the process and ensure optimal results:


Be cooperative and friendly. Give the buyer the information they want, and ensure that information is reliable. 


Don’t complain. You want to build trust and show the buyer you don’t have anything to hide.  


Practice open, honest communication. A transaction will run more smoothly and close more quickly when the buyer and seller have good chemistry and plenty of trust. This requires a foundation of honest and open communication. 


Encourage the buyer to see themselves as the new owner. Help the buyer feel like they can successfully manage the business. Present the business as a well-run machine.  


Avoid defensiveness. It’s natural to feel defensive in the face of criticism, but this approach does you no favors. 


Buyers ask questions because they need assistance to make decisions. It’s nothing personal, and not an attack on your business. Be open to these questions, and you’ll build a solid foundation of trust. 


Know that first impressions matter. Treat your business like a showroom. A buyer will conclude much about product quality, operational efficiency, and service based on how the business’s facilities appear. 


Be open, but optimistic, about growth opportunities. Buyers will approach the business from the perspective of a manager, looking for opportunities to improve the business. Help the buyer understand these opportunities, and support them to view inefficiencies as opportunities for growth. 


Be available. Regular meetings can help get the deal closer to closing. Once you identify a qualified buyer, plan regular meetings during which you are open, available, and not frequently interrupted. This is particularly important as you begin the process of due diligence. 


Maintain current financial records. When a buyer must wait for financial statements, enthusiasm declines and trust erodes. Notify your accountant of your intentions when you decide to sell, so that financial records are readily available and your buyer is not left waiting. 


Prepare for an emotional roller coaster. Due diligence can be an emotional ride. You’ve poured your heart and soul into this business and now must part with it. The buyer will also experience a range of emotions. 


Understand that the process of getting to a closing is as much psychological as it is about numbers. 


Arm yourself with a team of professional advisors. A skilled team of experts can help you more quickly sell the business, and with more favorable terms. Trust and confide in them early, and involve them at all stages of the process.


Certified Business Brokers Has the Experience You Need


With decades of experience, our professionals have more than 230 years of collective experience. Since 1974, we have been the leading brokers in Houston and the surrounding region. As a full-service brokerage firm, we stand by our solid track record and flawless reputation that has been built on delivering positive results for both buyers and sellers. 


Don’t go through the process alone. We’re here to help. Contact us today. 

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