Most business owners are selling for lifestyle, not financial, reasons. Common lifestyle reasons are retirement, becoming tired of the business, health, or the need to move elsewhere. The reason we say that these are lifestyle reasons rather than financial is that the motivation is based on lifestyle considerations, rather than financial. In most business sales of a successful business, the return on the sale proceeds, after taxes on the sale price, will be less than the owner was earning out of the business.
In many sales for lifestyle reasons, the owner may not have a choice on the timing. But, in some others, particularly retirement, there is a choice in timing. Some factors that come into play may be when the owner will collect social security if that is going to be a significant source of income. A financial planner can help a business owner, who wants to retire, see when they can afford to do so. It’s likely that there is some flexibility in that date. The sale price of the business will make a difference in that and the sale price can vary a lot. A higher sale price may allow an owner to retire earlier.
The fact that the sale price of the business can vary a lot is something an owner needs to consider. Although you may not be ready to retire, missing out on a high price could mean that you must work many more years. That’s because the money you have is going to have to last through your retirement. If you have less money to carry you through, you either need to lower your cost of living or reduce the number of years in retirement.
The primary driver of what your business will sell for is the determined by its earnings, or owner’s cash flow, and the market multiple. How good the market is for business sales certainly affects the sale price. But, so does the earnings of your business. The best time to sell is when both are high. If the economy goes into a recession, both of those numbers will probably go down. The combination of both of those going down can result in a much lower sale price than what you would have gotten before the recession.
If the income, or owner’s cash flow, goes down in a recession, they need to return to a higher level for about a year before a buyer will see the higher results and take those into account in presenting an offer. Market multiples also don’t immediately jump back to the higher, pre-recession, levels. See the chart below which shows the median market multiple before and after the 2008 recession.
These figures are from DealStats and are for sales in which the selling business revenues were between $2,000,000 and $15,000,000. Keep in mind that the recession started in the 4th quarter of 2008 so most of the 2008 sales were completed before the recession started.
One other thing to keep in mind. It takes time to sell a business. It typically takes 6 to 9 months to sell a business, but for planning purposes, you should plan on a year. If the economy goes into a recession while your business is on the market, it’s going to affect your sale price. Buyers don’t just look at historical figures, they will look at how the business is doing now. If the sales and profits start to go down, a buyer may pull out of a deal or offer a lower price. During a recession, the market multiples go down and the number of buyers goes down. Since World War II, the average length of time between recessions has been a little over 6 years. Looking at it from this perspective suggests that we are overdue for a recession. The average length of time a recession has lasted has been just under a year, although the 2008 – 2009 recession lasted 18 months.
For many business owners, now is probably a very good time to sell their business if you want to get the best price. Waiting to sell could mean you must work many more years before you can get a good enough price to afford to do so. The need to get your business on the market may not seem urgent when everything looks rosy, but it is if now is the right time.