Most economists agree we are headed for, or are already in, a mild recession that could last into 2023. The Federal Reserve has hiked interest rates and most likely will continue to curb inflation. Meanwhile, business sales and values continue to surpass the lows of 2020 and pre-Covid activity even though the general theory is that business value and sales would cool during a recession. Here are a few observations and reasons why we feel that activity and valuations will continue to be strong in the face of market stressors.
- There Has Not Been a Downturn Yet Through the second quarter of 2022, average business values sold at Transworld Business Advisors have continued to grow. The same goes for the number of transactions, with both exceeding a 20% year-over-year increase. Note however, that our business often lags economic trends so both indices could still shrink. But in the last economic downturn, while valuations were reduced, business sales stayed relatively strong. And the economy is in much better shape now than it was during the Great Recession.
- There is Still a Ton of Cash in the Market Banks are lending, and there is still a lot of money available in private equity and on businesses balance sheets to fund acquisitions. Even through a mild to moderate recession, this should continue.
- Interest Rates Will Rise This could bring down some of the prices as the borrowing capacity and leverage in each deal could have a downward impact on valuations. However, the interest rates are well below 10%, and for buying a business, this is still a good deal.
- There is a Glut of Buyers in the Market The ever-increasing level of resignation and relocation of employees to other areas of the country continues to drive many to pursue entrepreneurship. So even if buyer activity dropped by 25%, we would still have plenty of buyers.
- Inflation Has Not Completely Shrunk Small Businesses’ Bottom Line Most businesses have been able to raise prices to offset supply chain and labor issues. But we do feel there is a limit to this practice and if inflation does not ease, profits may fall; therefore, business values will follow. Again, another reason to consider selling now.
- Baby Boomers Are Starting to Sell The inventory of businesses for sale will eventually grow as business owners tire of the stressors such as labor costs, supply chain issues, and just plain old age. We are starting to see that happening now and suspect it will continue. So, while values may shrink some, the number of sales should continue to rise, which is a great opportunity for buyers.
Even if lower profits, higher interest rates and an increased amount of for-sale inventory come to the marketplace, we still feel that the number of buyers, combined with plenty of cash will result in a strong market for selling your business. However, as we have stated, time is of the essence as an extended or deep recession will hurt a business owner’s ability to cash out at what are now historic prices.