Business Owners Ready to Take the Money and Run
Small business owners who put off selling their businesses during a down economy are reconsidering in 2012.
A recent survey of business brokers around the country by BizBuySell found that 54 percent of respondents said that business-for-sale market conditions have improved in the first quarter of 2012; 58 percent of those surveyed said they expect that conditions will continue to improve throughout the year.
Among those signs: An increase in the number of interested buyers, along with an easing of lending restrictions that is making it easier for buyers to get financing.
That's good news for a cohort that has been waiting for conditions to improve.
“It’s the baby boomer phenomenon,” said Curtis Kroeker, general manager of BizBuySell, an online marketplace for buyers and sellers of small businesses and franchises. “There’s a big boomer group that’s ready to retire, and they’ve been waiting for conditions to get better before they sell.”
There's one more motivating factor: The potential rise in the capital gains tax. The uncertainly stems from the fact that the Bush era tax cuts expire on Dec. 31, 2012, and what that rate will be in 2013 and beyond is still anybody's guess.
"If you have owned a private company for a long time, and seen the value rise, and the economy is growing at a 1.5 percent or 2 percent clip, a lot of people are saying, 'I'll sell a little earlier than I thought,' to realize the gain," said Jose Rasco, senior investment strategist for HSBC Private Bank.
Rasco notes a "trifecta" of events that could spur more business owners to sell in 2012.
"We've heard more of our clients talking about selling, and seen more clients who have more liquidity due to the sale of their companies," he said. "The better valuation — the rise of the stock market, which improves values of private companies, as well — the tax structure, and the low growth in the economy are all working together to make business owners think about selling."
Scott Talbott, senior vice president for government affairs, Financial Services Roundtable, a financial services lobby group, agreed that the capital gains tax could be a motivator among business owners on the cusp of retirement.
“We are hearing from small business owners looking to get out before the end of the year,” he said. “It can take nine months to a year to find a buyer for a small business, so that uptick is starting now.”
While his group does not track sales of small businesses, he said that along with more interest in selling, they are seeing an increase in buying businesses, as well. The combination of motivated sellers, along with the easing of credit restrictions and low interest rates, make it an appealing time to buy, he said.
According to data from BizBuySell, its brokers reported a total of 1,729 closed transactions in the first quarter of 2012, a 3.9 percent increase from the first quarter of 2011. This was the largest number of transactions reported since the first quarter of 2008, and the third straight quarter of increased activity.
The survey, conducted in the first quarter of 2012, received responses from 262 brokers nationwide who reported a variety of factors that should help kick-start selling, including an increase in the number of interested buyers: 72.1 percent said they are getting more inquires. But the survey was a mixed bag. While there may be more interest in buying businesses, it's still a challenging economy for the sellers. Brokers noted that business owners who cannot produce good profit margins will have a difficult time selling their companies.
For those who are pricing their businesses to sell, there is some success on the sell side. Nearly 42 percent of brokers in the BizBuySell survey said sellers are doing a better job of pricing their businesses.
“In this challenging economic environment, sellers’ expectations have been reset,” said Kroeker. “They’ve been more realistic about the price they can get.”
In the franchise arena, which tracks transfers between franchisees and franchisers, 2011 was a busy year, according to the International Franchise Association.
In 2011, it reported that 21,817 existing franchise establishments were sold to new franchisees or back to franchisers. That number is expected to be about 15,000 in 2012.
“Last year, we had more desire by franchisees and franchisers to sell,” said Matthew Haller, vice president of public affairs for the IFA. “This year, there’s more appetite to grow. The industry has stabilized, and there’s more confidence in terms of franchise operators to invest in additional franchises.”
And boomers may be coming into play from the buyer side, as well. “For retirees, buying a franchise is often a second career,” said Haller.
William Dunkelberg, chief economist of the National Federation of Independent Business, agreed that boomers could be a driver of purchases as much as sales, and that "the tax motivation is certainly a player." While the NFIB does not track sales of businesses, Dunkelberg says the slowly improving economy that is motivating sellers could motivate buyers, as well.
“An improved economy could be making enterprises look more valuable to a buyer now. With the low interest rates, it might be that people are more willing to take the risk,” he said. “If you’re a retiree looking for something else to do, buying a business might be it.”
Still, challenges remain for both buyers and sellers. "There is an abundance of supply," said Kroeker. "The market is better than a year ago. As business performance continues to improve, as financing for buyers continues to improve, there are a lot of reasons to believe that transactions will continue to accelerate."