By Gregg Kunz
Times are good right now to consider selling a business. But as anyone who weathered the Great Recession storm knows, good times don’t last forever. We are currently in the 11th year of an expanding economy. It is widely considered unprecedented for a robust business cycle such as this to have lasted this long. Many business brokers and economists expect to see increased recessionary pressure at the end of 2020 and into 2021. They also expect the impact of the downturn to be felt for several years to come. While it may not pack the punch of the last recession, an economic downturn can affect the sale of your business.
Selling a business in a recession is much more difficult than selling in robust, non-recessionary times. Buyers are more reluctant to purchase a business during a recession. They worry about protecting their nest egg. They worry about financial stability. About how a target business will weather a recession of unknown duration. And, of course, they worry about financing.
Interest rates tend to go up in a recession, while banks tighten their lending requirements. Buyers that may have been well situated to acquire businesses during better times are often hobbled in a recession with tightened financing requirements, higher down payments, raised credit score requirements and the banks’ increased scrutiny of the viability of the targeted business and it’s ability to weather the recession. All in all, banks and prospective buyers worry about the recessionary impact and the sustainability of cash flow on the targeted business. This includes SBA financing as well.
With these increased financial requirements, sellers find that their pool of potential business buyers is markedly reduced. Furthermore, the seller won’t realize the same solid market sales price until the strength of the economy improves. Once the economy returns to non-recessionary metrics, banks relax lending requirements, which allows more buyers to enter the market.
And as every seasoned business broker knows, recessionary impact is often felt for years to come. A buyer may have to wait 5-7 years for a recessionary period and its impact to resolve. Really, the only winners in an economic downturn are well-healed potential buyers. Those buyers are less dependent on banks for financing and thus can scoop up businesses at a depressed price.
The key take-away here is the importance of preparing your business for sale while times are good. Be sure your business is attractive to buyers both now and during a recession. Business owners should continually prepare their business for sale. This includes things you should do like:
- Build a strong team
- Set the business up so it can run in your absence
- Formalize business processes
- Ensure that financial record keeping is especially sound and accurate
- Build a strong reputation through positive reviews
It essentially boils down to preparing a smart exit strategy from a fine-tuned, profitable business, regardless of market factors.
“It is the wise owner who is always preparing their business for a successful exit.” Never is this more true than with the very real potential for a downturn on the horizon.
Please note: If you’re looking for a “business broker near me,” we can help you! Our office is in Denver, and our business brokers cover all of Colorado and the Denver metro area, including: Lakewood, Aurora, Centennial, Wheat Ridge, Englewood, Littleton, Denver Tech Center, Golden, Arvada, Northglenn, Thornton, Broomfield, Westminster, Highlands Ranch, Commerce City, Lone Tree, and Brighton. We also help business owners in Wyoming and New Mexico sell their businesses.