Today's Economy and The Business For Sale Market
Unemployment is up, the stock market is down, banks aren’t lending, most businesses are experiencing declining sales and profits, people are losing their houses in record numbers and everyday there is more bad economic news. Seems like a crazy time to even consider buying a business doesn’t it?
I don’t blame you one bit if you believe it may be best to wait.
Perhaps you are thinking that you should just go about this cautiously, and if the right opportunity comes up, you will consider it. Caution is always a good approach, but nobody has ever been successful sitting on the sidelines.
So what should you do?
Despite the economy, if you approach the market correctly, it truly is an incredible time to buy a business because it is a buyer's market right now. Until recently, the seller always had the advantage. There were lots of able buyers, third-party financing was readily available, and sellers would be very rigid with their terms, and almost "cocky" in their approach. But those days are gone.
While it may be a buyer's market, there are certain fundamental steps you must take in today's economy to be sure you acquire a business that can withstand the current climate, and grow in the future. The lesson here is simple: today more than ever, you must be exceptionally diligent in your investigation.
The Business Buying Market Has Completely Changed
The entire market for business sales has changed. You must negotiate entirely different deal terms today in order to be protected.
Here's what is happening in the market right now:
- Banks have completely stopped lending money to finance small business purchases.
- People have lost their confidence in the economy; and while there are still plenty of “lookers”, real business buyers are few and far between.
- Sellers are concerned because there are so few qualified buyers. Plus, many businesses are in decline and their businesses have lost considerable value.
- Business brokers are panicked because they can’t sell anything right now.
What a mess! But what an opportunity it can be for a serious business buyer.
Five Crucial Issues To Keep In Mind When Looking At and Evaluating Businesses In The Current Market
The challenge you face is how to get through all of the garbage listings and find a rock-solid business that you can sustain and grow, and not wind up with a loser.
Issue # 1 - The Seller Must Be The Bank. Traditional lenders are simply not making loans for small business purchases. With the credit crunch, banks are no longer as willing to lend money for small business purchases. It may not sound so, but this is great news for buyers. It means that seller financing, one of the keys to buying a good business at a great price, is now a must. In fact, 91% of our clients have negotiated seller financing into their deals in the past year.
Issue # 2 - The Seller Must Guarantee The Future Of The Business. A performance-based guarantee attached to the purchase price is a must and something that we will help you negotiate. Nearly every single one of our clients is doing so today.
Issue # 3 - Buyers Need To Look At A Different Set Of Financials Than Normal. Instead of year-end numbers, you have to get access to the monthly financials for the past three years. You need to measure and compare the current monthly periods to prior ones so you can easily identify any decline in the business, determine when it began, and what the recent trends have been.
Issue # 4 - The Current Economy Won’t Last Forever. It never does. While a business may be experiencing a small decline now, as long as the key fundamentals are in place, the trend will eventually be reversed. Being able to identify these underlying fundamentals is paramount.
Issue # 5 - Valuations Must Reflect The Current Trends - Not The "Glory Days". If the business is not growing, you can easily rationalize taking the lower profit numbers and make them the entire basis for your valuation. That way, even if the company has had three tremendous years recently, you can calculate the valuation entirely upon the fact that they’ve experienced a slowdown recently. Nobody can dispute that argument.
Interestingly enough, our clients have closed more deals this year than ever before, and 91% of the deals they've done include significant seller financing and performance clauses. It shows that you can put the knowledge in our guide to use immediately and get major results.
Your Next Steps
I am not suggesting that you go out and buy the next business you see, but in this market you can really negotiate an incredible deal. At the same time, you must careful. Inexperienced buyers can easily get ripped off and wind up overpaying for a business that may soon go bust.
Having up-to-date knowledge is the key to success for today's business buyer. This is definitely not the time to try and guess your way ahead. There is so much more you have to look out for when evaluating a business today. And, you must have the knowledge and skill to put together a deal that shifts the risk to the seller.
Despite the economy, while everyone else is sitting around talking about all the doom and gloom, if you know what you're doing, you can put together a tremendous deal.
Richard Parkeris the author of How To Buy A Good Business At A Great Price. This best-selling program contains over 500 pagescovering every stage of the business-buying process. Visit www.diomo.com.
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