Based on my own observations from more than two decades in the field of business brokerage and mergers and acquisitions, many small businesses that survived the economic downtown are now seeing renewed strength in their top-line revenues, and solid or growing bottom-lines. In fact, the bottom-line cash flow for a number of businesses appears to be healthier than the top-line sales.
While this doesn’t mean all companies are back to pre-recession performance levels, entrepreneurs are likely to see new options for their business next year, thanks to an expected increase in bank loans and a larger pool of potential buyers.
Here are my four predictions for this year that could affect the sale of your company.
No. 1: Large Pool of Potential Buyers
There is expected to be no shortage of business buyers in 2011. That’s because there are a growing number of unemployed (or soon to be) middle- to senior-level executives who are likely to decide that buying a business is a feasible alternative to looking for a job.
While potentially more capital-intensive, these buyers realize that purchasing an existing business with revenues, clients, trained employees and cash flows could allow them the best possibility to sustain their lifestyle in the ab-sence of concrete employment options. However, these individuals would be wise to keep their options open (employment search, start a business, or buy an existing business) in case the right deal doesn’t materialize.
No. 2: Bank Lending on the Rise
Based on current and anticipated behavior, banks are expected to come back to the lending market for small-business acquisitions. From a business broker perspective, it’s been quite some time since bankers called to source deals. The good news is that they have started calling again.
Some evidence of this trend comes from Doug Adams, owner and Managing Partner of Emerson Capital, a Chicago-based loan broker that secures SBA loans for small businesses throughout the United States. “Our firm has seen a steady increase in funded deals with the SBA units of prominent preferred SBA lenders,” Adams says. “In fact, many commercial loan officers are referring their customers to the SBA lending divisions within their banks.” While many of these deals are smaller in size, this still bodes well for 2011. Businesses with adequate cash flow will ultimately see more overall activity in terms of bank lending this year.
No. 3: Increase in Business Valuations
Valuations are likely to increase for businesses with solid fundamentals. This may sound counter-intuitive, given current market conditions, but it’s basic supply and demand. There are an inordinate number of prospective (and qualified) buyers in the marketplace chasing a small number of healthy businesses. It’s not uncommon for good companies to attract a large number of buyers, which results in an auction-type atmosphere where buyers bid up prices and terms.
This dynamic will not face a major change this year. Business owners who are emotionally and financially ready to sell will be the benefactors of this lopsided market.
No. 4: Baby Boomers Will Start Selling
Back in 2007, one in every two baby boomers — who control almost 8 million small businesses in the U.S., according to BIGresearch — was expected to begin selling their businesses. This trend was on track until the recession hit. However, these boomers will retire soon and could revisit a sale.
When that happens, there will be a sharp increase of businesses on the market. The supply and demand dynamics will shift heavily in favor of buyers. At that point, sellers will need to be exceptional in order to secure a good price for their business.
Regardless of how 2011 plays out, one prediction will certainly hold true — businesses that take the proper steps to prepare for a potential sale will have a much better chance of achieving a successful exit than those who don’t.