In the Wall Street Journal today, there is an article titled “Economists Call for Bernanke to Stay, Say Recession is Over” that may be particularly interesting to business brokers and business owners who are considering a sale of their companies.
The WSJ surveyed 52 economists and 47 responded. Out of those surveyed, 28 believe the recession has ended within the last 2-3 months. Another 10 economists believe that the recession will end by the end of September.
Another important issue is that 27 of the economists believe that the Fed will raise interest rates in 2010, with the majority of those thinking the rate increase will be coming in the second half of 2010. If you’ve read my past blog posts, such as the one titled, “Start of the recovery? Time to think about selling your business“, you will understand why this is important, but allow me to reiterate the primary reasons that it may be an excellent window of opportunity if you are planning on selling your business.
During the recession most buyers were naturally very conservative about whether to buy a business and the price they were willing to pay. This makes a lot of sense, because in addition to normal specific business risk, they were also uncomfortable about the risks associated with further declines in the economy (i.e. “where’s the bottom?”, “How much worse are things going to get?”). However, once buyers feel comfortable that the economy is improving, even if not dramatically, they will become more comfortable with buying a business.
Those businesses that have performed well despite the recession will stand out even more in comparison to those that didn’t fare so well during the downturn, but that comparative advantage will start to erode as the economy improves and more businesses start showing improved performance.
Yet, as the economy improves the Fed will eventually increase interest rates. The prediction that the Fed will raise rates in the second half of 2010 will have an impact on business values. Aside from simply costing buyers more money to use debt financing, the increase in interest rates will impact the cost of capital which has a negative impact on business valuation. All other things equal, an increase of 1% in US long-term Treasury Bonds may reduce the all-cash price that a business seller will achieve by about 5%-7%.
Consequently, I believe that between now and July of 2010 will provide an excellent opportunity to sell a well-performing business. Since an average marketing time-frame for a small business being represented by a competent business broker is 6-9 months, I would encourage those who are considering a sale to start the process sooner rather than later (my recommendation would be to start the process now, or at the latest by December) in order to take advantage of this window of opportunity.
