John B. Charleston, III, MBA
I have been getting calls from small business owners looking to sell their businesses. Most of them are at or near retirement age and have been thinking about selling for a number of years. But the COVID-19 pandemic has made many of them think about selling. They don’t know if this is the right time to sell. They are actively looking for advice on what they should do.
Should I sell now, or wait?
When posed with the question from a business owner, “Is now the correct time to sell my business?” I have to ask them, “How did your business perform in 2020? Was business up, down, or neutral? Was the gain or loss due to the pandemic?” For those businesses that were revenue neutral or saw a revenue increase in 2020, now may be a good time to get their business on the market and put it in front of potential buyers.
If the business kept moving along in 2020 with modest increases in sales and profitability, consistent with past growth, they are ripe for selling.
If business increased too much (more than 25%) you may not see an increase in the demand for those businesses. Contractors, builders, home decorating companies, liquor stores, grocery stores, pool and spa companies are prime examples of companies that had record years. But will the huge gains in revenues and profitability continue for these industries? No one really has an answer. I spoke to the owner of a business that benefited with increased sales of about 30% last year. He was thinking of selling in 2021. With business booming, he wants to ride out 2021, make as much money as possible and build up their retirement accounts. They are now looking at 2022 as the target year to sell and retire. How many other business owners feel the same way?
What has the pandemic done to business value?
The second question all business owners ask, “How much is their business worth?” As before, businesses are valued on the cash flow they generate for the owner. BizBuySell.com announced in their Q4 2020 Insight report that business prices surged 12% over 2019. Part of that surge was because of higher revenues (8.2% higher) and median cash flow was up 10.2%. This drove up the prices of pandemic resistant businesses. You can see the whole report here: https://www.bizbuysell.com/insight-report/
What will be interesting is how buyers, banks, and valuation professionals will look at 2020 financial results for companies that had a record year because of the pandemic. A few bankers I have spoken to are more concerned about the business financials from 2015-2019. If a business had a record year in 2020 because of the pandemic they have talked about normalizing the 2020 numbers to fit more in line with what the financials showed the 3-5 years prior. Or just ignoring them altogether. I think that the extra value in a business will come because it was pandemic resistant not because it had record profits in 2020.
How fast will my business sell?
That is something we don’t know. The average time to sell a business was about 9-11 months. That was pre-pandemic. We don’t have any good statistics on what the timing is now. According to the IBBA Q4 2020 industry report, 17% of brokers think that the market was back to pre-pandemic levels, 22% think it will take until Q2, 2020, 22% think Q3,2020, and 18% think Q1, 2022. With so many opinions on where the industry stands now, selling a business may take longer than before the pandemic.
You can see the full report here: https://www.ibba.org/market-pulse-q4-2020-survey-results/
CARES ACT – 2021
With the new stimulus package that is out, it might help jump start business sales and reduce the time to sell.
The SBA announced that they are waiving SBA guarantee fees on most SBA loans (which can be 3.25% of the loan amount) and are paying the first 6 months payments on the SBA loans up to $9000/month. If you take out a loan and your payments would normally be $3,000/month, you save $18,000 the first 6 months. It makes a nice cash flow cushion for a new business owner. You need to be approved for an SBA loan by 9/30/2021 or before funds run out to qualify.
Buyer motivation seems to vary right now. I’ve had phone calls with a number of people looking to buy their first business. There are phone calls from buyers looking for bargains on struggling businesses. I’ve also spoken to a number of current business owners that want to buy a successful business to add to their portfolio.
In most cases they are patient buyers and are looking for the right fit. They are not in hurry, but will make a move when the right opportunity presents itself.
Only time will tell if 2021 is right time for you or other small business owners to sell (or buy) a business.