Has the “Great Recession” Affected the Value of Your Business?

The short answer to this question is “yes” and probably in a negative way. Some businesses may do better in a recession, such as discount retailers, but most small businesses need a growing economy to thrive. As you would expect, the lower the income a business has, the lower the value of the business. A concise definition of the value of a business is “the present value of the expected future benefits.” The major future benefits are future profits and selling price, so the greater the profits the greater the value.

With today’s choppy economy, most small businesses are finding their sales and income down and, therefore, the value of their business has also gone down. We still have relatively high unemployment and a fear that interest rates and inflation will soon take off as a result of the current massive government budget deficits.

Because of the uncertain economic outlook, there is a dearth of buyers for small businesses. Even though we are entering a period when Baby Boomers should be selling their businesses and retiring, buyers are scarce. Boomers are having to hang on longer than they had previously planned to. Most current merger & acquisition (M & A) activity involves “strategic buyers,” i.e., buyers from the same industry looking to eliminate competition and increase market share. Strategic buyers can usually eliminate some redundant expenses so the acquisition isn’t quite as risky to them as it is to an investment buyer.

Lack of financing is also dampening the market for small businesses. Although banks never were in the venture capital business, they are really gun-shy now with regulators constantly looking over their shoulders. Most M & A activity today requires a high percentage of the selling price to be financed by the seller. Banks will finance a percentage of tangible assets and working capital, but any goodwill will have to be carried by the seller.

With a poor seller’s market and uncertain economy, what’s a small business owner to do? We think now is an excellent opportunity to fine tune the operation of your business. Sometimes it is easier to make the tough decisions when the economy is in the tank. Then, when the economy picks up again, and it will, you will be in great shape for being more profitable and thereby increase the value of your business.

We would be happy to assist you in indentifying cost saving measures and improving working capital practices that will increase cash flow. Take advantage of this slow economy to spend more time working on your business instead of in your business.