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Owners Are Selling Businesses. Is the Economy Improving?

Wednesday, 8 Aug 2012 | 10:45 AM ET
Stephen Mallon | Stone | Getty Images

Small businesses are often used as a measuring stick for the U.S. economy. The more there are—and the jobs they create—the better the economic conditions.

But some analysts say there's another way small businesses provide a window on the economy—by the number that are bought and sold.

"A healthy market for business succession means a better overall economy," says Mike Handelsman, Group General Manager for BizBuySell.com and BizQuest.com,websites that are a business-for-sale marketplace.

"If more small businesses are changing hands, it speaks to the improved availability of credit in the market place," says Mark Tepper, CFP and president of Strategic Wealth Partners, a wealth management firm for entrepreneurs and business owners.

Whether the current buying and selling of smaller businesses reflects a growing—or slowing—economy, is up for debate. So too is the state of the small business community.

"Larger businesses have done better since the recession because they have better financial resources," says Scott Shane, professor of Entrepreneurial Studies at Case Western Reserve University. "We don't know how to get consumers buying, and absent any big growth in the economy, it's hard to see things getting better for small businesses."

So how many businesses are being bought and sold these days?

Reported business-for-sale transactions in the U.S. dropped 1.6 percent in the second quarter of 2012, compared to the same quarter in 2011, according to BizBuySell, which keeps track of sales records. However, year-to-date business sales for 2012 are above the 2011 figures; and the median asking price for a business, around $175,000, is also higher this year than last. Also up are revenues for the businesses being sold, with the median average $360,000 in 2012 compared to $340,000 in 2011.

Sectors showing the most sale transactions, according to the survey, include those in the service industry, retail outlets, and restaurants. Manufacturing is near the bottom.

A caution: the total number of small businesses bought and sold is not large—not every deal is available to be tracked. BizBuySell lists business sales transactions for 2009 as 6,223. In 2010 the number was 6,486 in 2010; in 2011 it was 6,631.

But even as sales numbers increase ever so slightly, it may not mean a healthier economy is around the corner, says Rhett Weiss, Executive Director of the Entrepreneurship and Innovation Institute at Cornell University.

"It could signal a better economy — or it could be a sign that buyers who delayed or postponed purchases during the last few years are making them out of necessity," Weiss says.

Fired workers see entrepreneurship as fresh start

One reason for an increase in business buying may be that people need income, says Brian Miller, a former small business owner and current COO of The Entrepreneur's Source, a business ownership and franchise coaching organization.

"We're still working our way through the Great Recession and workers who were laid off are looking at entrepreneurship as a new career," Miller explains. "Many people realize working for a corporation is not going to reap rewards."

"It could signal a better economy — or it could be a sign that buyers who delayed or postponed purchases during the last few years are making them out of necessity." -Executive Director, Entrepreneurship & Innovation Institute, Cornell University, Rhett Weiss

For some entrepreneurs, being your own boss and working close to home are reasons to buy a business, says Djenane Bartholomew, who with her husband bought a franchise outlet of Let's Yo Yogurt in central New Jersey, after 10 years of running both a Subway and Dunkin Donuts in New York City.

"The commute to the city was getting to us," says the 35-year-old former nurse who says she had no trouble selling her New York franchises. "This is much closer to where we live. It's hard work, but I love what I do and like being in charge."

As for selling a business, reasons can vary from realizing the 24/7 of being a business owner is overwhelming, selling to fund retirement and other lifestyle needs, or facing new and costly challenges.

"I'd experienced success and failure, and I understood that to take my business to a global market took more money than the cash reserves I had," says 39-year-old Fadi Shuman, who sold his New York based digital marketing business, Pod1, in June of this year to a larger firm that still employs him as CEO.

"The buyer of the firm had all the resources to ensure future success of the business and at the end of 11 years of running it, and about to turn 40 with a new wife and child, it was harder to risk it all as I had earlier," Shuman says.

Another reason to sell is a deal that's too good to turn down, says 44-year-old John Rotche who sold his Michigan based air duct firm DUCTZ in 2007.

"I wasn't planning to sell but the company that bought us approached me," says Rotche, now president of TITLE Boxing Club, a fitness workout franchise firm.

"My first reaction was not to do it," Rotche says, who stayed on with DUCTZ for a while to help run the firm. "I started out the company in my daughter's bedroom in 2003 and we had a lot of success. But the offer was too hard to refuse."

Rotche adds that selling his business taught him how to run one.

"When you do the due diligence for a sale, answer all the questions and put a business plan together, it's like a final exam," Rotche says. "It makes you so much smarter when you start a new business."

As for the right time to sell or buy a small business—bad economy or not—it always comes down to the business itself, says Russ Allred.

"It's always a good time to sell a business when it's profitable," Allred argues. "Conversely, the best time to buy a business is when the buyer has good credit, financing and time to negotiate. It's just not always easy right now to get to those conditions for either side."

By CNBC.com senior editor Mark Koba.

Email us at SmallBiz@cnbc.com and follow us on Twitter @SmallBizCNBC.

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