Buying or Selling a Business

In today's economy, buyers and sellers of small businesses struggle to know when the time is right to make a move.

Buyers wonder whether a declining market could mean bargain-basement prices.  Owners are concerned about getting a fair valuation. 

Deciding on whether or not to buy or sell a business depends on different variables.

Because the sale of a business is invariably a large transaction, both buyer and seller need to fully comprehend its dimensions to remove as many chance elements as possible from the decision-making process.

Three crucial areas need to be assessed in purchasing or selling a business:

1.     Economic conditions

2.     Industry trends

3.     Company's management and financial profile

Since these areas can be highly dynamic and often do intersect, timing will invariably play a critical role.  Decisions must be based on qualitative as well as quantitative factors.

The economy can influence the timing and valuation of a business.  Recent sales of  businesses in the area or industry will affect the price.  A slow economy can drive some businesses to sell if they can no longer continue operations on their own thus driving down the market price. 

A vital component of the valuation process is the attractiveness of the related industry to buyers.  For example,  because an advertising firm, local car wash and a metal supplier  have different appeal in the current marketplace, their valuations will vary.  Buyers and sellers have to determine an industry's direction and ask such questions as "How has globalization impacted companies in this industry?" and "Is there an opportunity for a larger market share in this industry?"

Consolidation can play a pivotal role in determining how businesses operate.  Current trends dictate that big companies look for versatile suppliers capable of serving a broad regional base.  The result is smaller suppliers have found themselves the acquisition targets of larger competitors seeking to spread expenses over a greater revenue stream.

Survival for many of these small suppliers is the ability to respond effectively to the demands of their large company customers.  Companies unable to adjust to such market conditions will be unable to flourish independently and have to put themselves up for sale.

No decision to buy or sell can be made without a careful consideration of the nature and structure of the company.  If the owner is on the verge of retirement, will he/she be willing to make a major capital investment to improve the company?  Does the current management team want to stay?  What is the debt structure of the company?

Strategic buyers look for solid management teams, a professional culture and up-to-date information systems and infrastructure.  Lacking these, a seller may need to strengthen its product lines or service capabilities to enhance its value and appeal to buyers.

Every decision to buy or sell is unique and should focus on economic environment, market conditions and company characteristics.