Advising Our Clients Part 3: What’s Selling?

What’s selling? We get that question all the time. We’ve gotten it with more frequency during the last year as the corona virus has spread through Europe and then the Americas. But we also get – and just as frequently – the more general question of, “how’s the market for business sales?” We get these questions from many folks that know what we do but are neither buyers nor seller. They’re simply making small talk – kind of like running into a friend at dinner one evening and asking, “How’s business?” But as you can imagine, we often get that question from buyers and sellers; and how they ask is reflective of which side of the any deal they’d be on. These days, potential sellers ask with a greater or lesser degree of trepidation in their voice – that degree depending on what kind of business they’re in. Buyers, on the other hand, often exhibit poorly-disguised avarice; not quite openly salivating but eagerly anticipating good news for them and bad news for sellers. Well, it’s not as clear cut as that. Like all markets, there are winners and losers. But before I tackle the question of what’s selling, let me address the second question – the one about the overall market.

“How’s the Market for Business Sales?”

In the United States, roughly 50% of all businesses are owned by Baby Boomers (according to the U.S. Census Bureau) and a great deal of them are starting the selling process. (See The Baby Boomer Business Sell-off and The Silver Tsunami.) Given the ‘rona devastation is certain business segments, many of them are reevaluating their plans and wondering if they should sell now or wait in the hope that the pending arrival of several promising vaccines will spark a near-term recovery. According to a recent Small Business Confidence Study, 43% of business owners expect the economy to return to pre-corona levels by the fourth quarter of 2021 with 20% expecting the economy to recover sooner. I suspect the difference reflects the respondents’ different industries.

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But demand for existing businesses has been strong, particularly in certain business segments. Traffic to our listings has been brisk and email volume – particularly from private equity groups (PEGs) and family offices looking for lower Middle Market opportunities – has hardly budged from the frenetic levels that we witnessed starting in early 2017. (See, Who’s Buying Businesses.) So, “how’s the market for business sales?” In a word – or maybe two – pretty healthy. Though bad news for vultures and bottom-feeders, after a brief pause in late Spring and early Summer, it’s still a seller’s market in many business segments But that brings me to the first question: What’s selling?

What’s Selling?

The answer to that question in a word – or maybe two – is “essential” businesses. If your client owns what would be considered an essential business, the opportunity to “go out on top” is unlikely to be this compelling again. Why? For several reasons.

1. Most segments of the economy – which seem to have digested the virus and found it only mildly unsettling; as well as the news that multiple vaccines hitting the market in the next 30-60 days is highly likely – are chugging right along with a full head of steam.
2. With stock markets climbing to new records seemingly every week, the buying market is awash with money, all of it looking for a hospitable place to land.
3. Though several governments around the world are threatening higher taxes to offset revenue declines attributed to their own mandated shutdowns, it will take some time for such legislation to pass – if it passes at all.

(In the U.S., the big fear is the threatened near doubling of the capital gains tax by the next administration, a condition that will be possible only if the two Georgia Senate runoffs in early January are won by Democrats. And in the event, such legislation will probably need at least six months to work its way through the sausage mill that is the U.S Congress, suggesting that such increase won’t impact sales closed prior to Q3 or Q4 2021.

(However, in the legislative equivalent of “moving the goal posts”, it is not unheard of that the self-styled “World’s Greatest Deliberative Body”, if controlled by the blue team, would simply make the legislation effective retroactively to some earlier date – like 1st January.)

Essential businesses are in high demand and garnering a lot of interest right now. There’s a lot of competition for well-run businesses that have been making money during the pandemic. Competition pushes up multiples and thus prices. Here are some examples of businesses being targeted by buyers, both financial and strategic.

• Healthcare businesses, clinical and non-clinical. Virus or no, the population continues to age everywhere (with the possible exception of Hollywood).
• Technology businesses such as those supporting remote workers, providing network security and tech support.
• Real estate-related businesses such as real estate brokerages, title companies, closing and settlement businesses, land planners and surveyors. The desire to move away from urban areas combined with the lowest interest rates in history have turned real estate-related businesses in money-printing machines – and highly coveted.
• Moving companies that move all the crap from a 12th floor 800 square foot apartment on the upper west side of Manhattan to a three-bedroom, two bath colonial on 3/4 of an acre in rural New Jersey have never been busier. The same is true near any major urban area.
• Any business with a recurring revenue business model.
• Even some restaurants – most notably the ones with drive-throughs as well as those that have perfected an efficient curb-side pickup program.

Of course, there are businesses that are struggling – and, unfortunately, too many of them won’t survive. To the owners of struggling businesses, we try to offer advice that will help them get through this dark period. We try to imagine how the owners can change their business model to generate additional revenue. For a retail business, this might mean beefing up their online presence, offering same-day delivery and discounts on purchases above $XX. People are fully acclimated to online shopping. If it made Jeff Bezos the richest man in the world, it can certainly help Louie’s Loose Teas and Delphine’s Delicious Desserts.

The Bottom Line

During this period of unprecedented volatility, our job of advising our clients has taken on a larger role in our day-to-day business. Yes, there are several broad categories of business owners that some general advice would be helpful to but many business owners find themselves in a unique – at least to them – situation that they aren’t at all prepared to face. With our understanding of the market, we have an opportunity to explain to our clients what the proverbial terrain looks like and suggest some options that they may not have thought of. If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast. I’ll be back with you agin next Monday. In the meantime, I hope you have a safe and profitable week.