Is a pandemic a good time to buy or sell a small business?
If the frequency with which people are using the word “unprecedented” is any indication, it’s safe to be skeptical of anyone who tells you “the pandemic is a good time to do x.” Nobody has ever lived through anything like we are experiencing right now, and the same goes for those trying to pilot businesses during the wild torrent of market forces at the moment.
“The first thing we know is what we don’t know,” wrote Richard Parker, a small business strategist in Forbes. “We don’t know how long it will last, what it will look like after, who will disappear, and who will thrive.”
Which means that two things we need more than anything else at the moment are humility and caution. After 30 years as a small business broker, Parker said he is an optimist. Since the pandemic began his “optimism has not changed but (his) approach is completely different now.
“If you were thinking about buying a business prior to this pandemic, put on the brakes,” he wrote in March. “If you are thinking about buying one as a result of it, do so slowly…very, very slowly.”
That latter group—of people buying as a result of the pandemic—has grown tremendously. As an example, our marketplace saw traffic plunge 15% as an aftermath of the March lockdowns. Interest in the businesses that had been shut down—in the service or travel industry, for instance—declined rapidly, but interest in e-commerce, convenience and gas stations surged.
What we discovered in the next few weeks and months was the sudden emergence of an aggressive buyer’s market.
We saw buyers with more cash on hand, in fact, we saw a buyer premium of 27%*, however, longer listing timelines as most buyers believed prices of businesses would come down as a result of the pandemic.
Many professionals in the business for sale micro marketing estimate that that buyer’s market is set to continue for the next 12 to 18 months.
But those expectations need to be tempered, because while some small business owners who may be looking to sell may have dropped their asking price as a result of the pandemic (restricted cash flows and diminished valuations), it’s not necessarily a given that every one of those businesses will bounce back after the pandemic.
Sellers are also faced with a dilemma. In some cases, those looking to sell and who can afford to be flexible with timing may either benefit or suffer as a result of trying to wait out the pandemic. If you’re looking to sell a company that disinfects commercial buildings, an example Parker used in his piece, you can make a pretty intelligent guess that now is probably a good time to sell that company. But in the future, who knows.
In a two-part series Patricia Farrell, an attorney writing for Kiplinger, suggested that it’s best to undertake a financial analysis ahead of any transaction and then evaluate your personal situation. Is it worth it to sell, which way is the valuation heading, and can you wait? If you can’t wait, if a health issue is preventing you from working for instance and the valuation is decreasing, then “you may need to adjust your expectations, not only in the value of the business, but of how that value translates to purchase price,” she warns.
“You may find that buyers are likewise wary of the future and hedge their bets by structuring deals so that the largest portion of the purchase price is paid at a future time in the form of an earn-out. There is risk to the business owner in this situation.”
It’s a risky time for all of us, but also one that’s full of opportunity. Now, more so than any other time, there is no a substitute for proper planning and diligence.
Remember, if you are interested in receiving the latest business news, insights and opportunities from Buy and Sell a Business, you can subscribe to our newsletter here or join our text messaging list here. Also, if you are not a Buy and Sell a Business user yet, what are you waiting for? Click here!
Opinions expressed here by Contributors are their own.
BuyAndSellABusiness.com is also running a buyer’s workshop for those looking to purchase any small business—franchise or otherwise. It’s just 30 minutes long and completely free. You can register at our website.
Also, we launched a private Slack community designed to help people connect, share insight and ask questions about buying, selling and growing businesses or franchises. Apply to join here.
*the difference between our average listing price and average connection price (%)