Privately-Held Business Marketplace Blog

Supply and Demand Major Factor When Selling a Business

Share this  post on:

There is little question that the last few years have been one of the most challenging economic periods most business owners have ever experienced. Many business owners and baby boomers have put off selling their business and retiring because of the economy. Many business owners that are nearing retirement or are considering selling their business would probably be quite surprised to find that it is not necessarily a buyer’s market in every industry. Fortunately for some business owners, the fundamental laws of supply and demand still create opportunities where the trend towards a buyer’s market in the merger and acquisition marketplace has been offset by the low supply of business acquisition opportunities relative to the high number of buyers within some industries.

 

Without question, business valuations can be negatively affected and the business acquisition marketplace can be a buyer’s market” during downtowns in the economy such as we have experienced during the recent recession. However, in some industries and/or larger businesses, the principals of supply and demand can also have a strong impact to counteract the negative effects of the downturn. 

 

As an M&A brokerage firm, BusinessQuest has seen firsthand the impact of the economic downturn in creating a buyer’s market in many industries and businesses. The marketplace for smaller businesses in particularly has been severely affected by reduced sales, reduced profits, reduced valuations and the lack of small business acquisition financing as a result of the economy. As an example, exactly 50% of the business acquisitions that we brokered in 2010 had selling prices under $1 million. Normally, we would expect to see smaller business acquisitions with prices under $1 million account for roughly 70% to 80% of business transactions since small businesses account for a disproportionately high number of all businesses. Fortunately, the small business marketplace does appear to be improving but at a relatively slow pace.

 

Alternatively, we have seen a relatively favorable market for larger businesses in a few industries where the forecast is positive and the lack of available acquisition candidates has resulted in neutralizing what would otherwise be considered a buyer’s market. In a few industries, it could even be argued that the low supply relative to buyer demand has tilted the scales more favorably towards sellers. Financial and strategic buyers who have had their money sitting on the sidelines during the recession seem to be poised to make investments and have a strong appetite for quality acquisition candidates.

 

In particular, larger businesses and businesses for sale within the healthcare, medical device, alternative energy, recycling, aerospace manufacturing and niche business service industries to name a few, seem to be in high demand and low supply. Additionally, regardless of industry, businesses that have managed to maintain strong sales and earnings during the recession have differentiated themselves from the competition and demonstrated an unquestionable basis for a price premium relative to industry peers. These resilient and profitable companies are in relatively low supply and therefore can command higher prices in the business marketplace.

 

Market conditions relative to supply and demand to do not translate easily or directly into business valuations but in the actual business marketplace, the impact of supply and demand principles can have a very significant and real impact on pricing that should not be underestimated. Even during the early recovery stages of the recession, low supply and high demand within a given industry can provide excellent conditions to successfully exit a business.