What Does Economic Recovery Mean for Business Sellers?

The general attitude that business sellers take when the economy is improving is a wait and see attitude. It’s normal to expect business buyers to be more optimistic about the purchase of a business and as a result to be willing to pay more to achieve that dream. Prices for businesses are therefore expected to rise and most business sellers want to take advantage to such a rise.

However, business prices like prices for any other asset are only a function of supply and demand at a given time. Factors that influence prices must influence supply, demand or both of them at the same time. When most sellers are waiting, prices tend to jump instantly because of a lack of supply. Demand also increases as investor sentiment improves. Spikes in prices tend to happen way before most sellers expect it. When sellers realize that prices have increased, they all tend to jump in the market instantly, driving prices down again. This is exactly what happened to the Canadian real estate market between May 2009 and April 2010. Prices increased dramatically at the very early stages of recovery and started declining as the recovery was confirmed. The business for sale market tends to follow a very similar pattern.

There are so many other reasons why business sellers who are ready to sell their businesses should act now and not wait for the market to improve. These are some of these reasons:

• The massive retirement of baby boomers who own businesses might increase the supply of businesses and decrease prices.
• The expected shortage of labor in the work marketplace might reduce potential buyers looking for job replacement, reducing demand and driving prices down.
• Sellers waiting for prices to increase might lose interest in their business, driving down performance and therefore business value, which could not be compensated by a price increase.
• Sellers with health issues might run short of energy and time to transfer the business to the buyer driving their business value to practically to zero.
• Business is like a perishable good, it could lose a lot of its value if its owner’s drive is not there anymore.
• Another recession might hit before the sellers even realizes it, which could make the sale of the business almost impossible.

There are so many other reasons why owners who are ready should sell and not wait for a wishful and unrealistic increase in prices. Aside from extremely unfavorable market conditions, the sale of a company should be made when the seller is ready not when the market is perceived to have peaked. Trying to time the market to sell for the best possible price is rarely a good idea when selling a business.