Selling a Business: The Market is 2022

7 February 2022: Selling a Business – The Market in 2022

If you’re thinking of selling a business – either as a business owner or business broker – it’d be nice to know what the market for business sales is likely to look like over the next year, don’t ya think?

And while we don’t have any crystal balls, we can look at trends, public pronouncements, demographics, actions by governments and a host of other data and come up with a fairly good idea of what we might expect – and prepare for.

We go through this little exercise periodically, not only for our own planning but so that we can advise our clients on the state of the market; specifically, what should be considered if they’re seriously contemplating selling.

Here’s the guidance we’re giving them now.

Buyers

They’re out there – and in significant numbers. This is especially true if the business you’re selling is in the lower Middle Market.

If you’re selling a business that has $500,000 or more in Discretionary Earnings, there is no shortage of buyers.

We continue to receive between five and 10 inquiries every week from small private equity groups, family offices and high net worth individuals looking for opportunities. (See our “Searching For…” feature at the bottom of every post for the last six months or so.)

We also continue to receive inquiries from individual buyers looking for a specific type of business.

But one of the recent surprises is the number of inquires we’ve begun getting that specifically mention “roll-ups” – the acquisition of multiple, sometimes dozens, of businesses in the same channel. Roll-ups are an acquisition strategy whereby the buyers target one particular type of business – car washes, home health care businesses, hardware stores – and buys dozens or even hundreds of them. Roll-ups weren’t “invented” by Wayne Huizenga but with Blockbuster Video, Waste Management and AutoNation, he sure popularized the concept!

The inquiries we’re receiving are mostly from financial buyers but there’s been a growing flow of inquiries from strategic buyers, as well; those looking for a business they can “bolt on” to their existing operations.

There are plenty of buyers out there for any profitable business that is properly priced. And there’s plenty of cash available for those buyers to make these deals.

Financing

Financing availability is dependent on the availability of money – how much is out there, how much that money costs and the willingness of lenders to lend.

Most first world economies have been chugging along at high speed since the frightening economic collapse in March 2020 when the Covid virus loomed large and scared the bejesus out of pretty much everybody. Much of the capital used in recent years to acquire businesses – by private equity groups or individuals – has been pulled from stock market gains and stock markets around the world have been notching impressive growth – at least until the beginning of this year when things started getting a little wobbly.

Again, with the exception of the March 202o selloff, in the U.S., the broader stock indexes have been on a tear since the day Trump was elected president. Even given that March 2020 selloff, the market was up more than 16% that year. And even the Biden administration has been unable to stop this freight train (though it has made several attempts).

The way most governments reacted to the virus – firing up the printing presses and dropping trillions of newly-minted bank notes on an increasingly dependent population – assured that there would be plenty of capital sloshing around that had to be absorbed somewhere.

But by creating all this cash and flooding the markets with it, these governments unleashed inflation which is now higher than it’s been in forty years. Businesses from McDonalds to Waldo’s Wonderful Widgets are facing higher costs for materials thereby putting pressure on profits. Prices will have to be raised – thus putting pressure on sales.

We offer a comprehensive coaching program tailored to Realtors, business owners and anyone interested in buying or selling a businesses.

If you’d like to learn more, email me at jo*@Wo*******************.com

Central banks around the world are starting to realize that inflation is getting dangerously high and if nothing is done soon, it could get out of control. They are starting to raise interest rates in the hope of tamping it down.

The Bank of England has begun raising and the U.S. Fed has signaled at least three pops are planned for this year. It’s debatable whether these moves will tame inflation but rates have been at historic lows for a couple of years and even the rate pops forecast by the central banks are not expected to impact lending volume except at the margins. Next year might be another story, though.

Competition

We’re at the beginning of what we refer to as the “Silver Tsunami” – the Baby Boomer Business Sell Off.

So-called Baby Boomers, reputed to be the most prolific entrepreneurial generation, have begun heading for the exits. This phenomenon is worldwide and is projected to last at least another 10 years. This means that business sellers will face competition for buyers.

Millions of businesses are projected to come to market between now and 2035. This will drive two trends.

First, it may put downward pressure on prices. When buyers have a lot of options, they can be quite choosy.

Second, there is a growing need for people that can help these owners sell their business.

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Our course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, teaches you how to value and sell businesses.

Become a Professional Business Broker…

Remember, most businesses that come to market don’t sell. Remember also that there are three main reason they don’t sell.

The first is that they’re priced wrong. Someone who knows how to value a business needs to be involved.

Second, they have poor representation. Hiring a real estate agent that has not been trained in how to value and sell businesses is likely to result in disappointment for business owners. It’ll be even worse if the business owner tries the DIY method.

Third, the condition of the average small business’ books is usually worse than California rail yards after the locals finish raiding the parked freight cars trying to steal anything worth more than a buck-fifty.

Because there is growing competition, business owners that don’t hire a professional are at a steep disadvantage. Remember the old adage that a lawyer that represents himself has a fool for a client? The same logic applies even more so to a business owner that tries to sell her business herself. Lawyers, after all, at least start out knowing the law.

The Bottom Line

We expect that selling a business in 2022 – at least one that’s properly priced – will be a fairly straight forward affair. There are plenty of buyers out there and plenty of money available at good rates for acquisitions.

We expect some interest rate hikes but we don’t expect rates to go up so much that they will dampen M&A activity – at least not this year.

But we do believe that competition will intensify, albeit gradually, which suggests that 2022 may be impacted, albeit marginally.

The Baby Boomer Business Sell Off is real and higher interest rates are coming.

More and more businesses will be coming to market over the next few years meaning that competition among sellers for the buyers in the market will grow. This will likely put downward pressure on prices.

Higher interest rates will make it harder for buyers to realize the rate of return they want – which will also put downward pressure on prices.

All of this suggests that any business owner considering selling their business should consider doing so sooner rather than later. It also suggests that Realtors that have ever had any interest in getting into business brokering should get serious about learning how.

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 again next Monday. In the meantime, I hope you have a safe and profitable week.

Searching For…

We have a buyer for US- and Canada-based businesses generating at least $2 million in Discretionary Earnings in the following fields: general recurring maintenance services, mechanical equipment servicing, wind turbine maintenance, commercial kitchen services and equipment maintenance. If any of you know of something that might fit, please let me know.

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The author is the founder of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 1,000 in the world. He can be reached at jo*@Wo*******************.com