A comment was posted to the October 18th blog where I discussed a situation of a business going south after the sale. While the comment noted was not fully related to the specific blog, it brought up a timely subject that unfortunately seems to summarize the market for those looking to buy and/or sell a business.
The comment made was: “Buyer interest and confidence is the worst I've ever experienced. Buyers are extremely cautious and hesitate to act. Sellers have not lowered their expectations yet and the owners with good businesses are holding on and are deciding not to sell now, but in a few years.”
I have been quite vocal about the point regarding buyer confidence, or rather the lack thereof, as being the single most important factor that must be reversed before business sales will begin to reach prior levels. Regardless of the lack of financing that may be available, until people believe that buying a business is the right move, the market will remain depressed. What I cannot comprehend however, is the mindset of far too many sellers today, which the posting I noted above summarizes perfectly.
Business sales across the country appear to be down from thirty to fifty percent compared to a few years ago yet there does not appear to be any commensurate curtailed activity in the number of businesses being listed. I get regular updates from the business for sale websites in a variety of categories to keep a generic pulse on listing activity, asking prices, and other metrics and the volume of new listings within these common categories does not seem to have declined exorbitantly since we hit this economic funk. Plenty of businesses are still getting listed for sale but for some reason, the asking prices and deal terms have not been altered to reflect the reality of today’s market.
There is a long held belief amongst many business brokers that getting the listing is the top priority and that asking prices and issues inherent in the business can all be addressed as time goes on if the business does not sale. Personally, I believe this tactic is completely ridiculous and is likely the reason why only a fraction of businesses listed for sale ever get sold. While there is no quantifiable data that the industry ever produces about percentages of businesses that sell as a ratio to the number of businesses listed (they claim somewhere between one in three to one in five which is an enormous margin of error) it is likely because the industry shies away from providing any accurate data in fear of what it will convey. My experience dictates that the twenty percent “low number” is infinitely more accurate. This has been the same statistic in good times and bad.
When you consider the time and effort that all stakeholders to this process including brokers, buyers and sellers devote to listing, packaging, advertising, reviewing, analyzing, meeting, negotiating, plus costs incurred to engaged accountants and attorneys yet 80 percent of listings never sell, at some point one would think that someone would have enough common sense to step back from how things have “always been done” and figure out a way to do this more effectively.
As long as business brokerage remains steeped in legacy with the antiquated strategy of “listings above all else”, you can be assured that the statistics will never get better. The by-product to this tactic is that listings are taken and sellers begin the process with unrealistic expectations about purchase prices and deal terms which are very difficult to undo.
If a business owner truly wants to sell their business, then regardless of whether there is a broker involved or not, they have to position it to be attractive for someone to buy it. Until such time as businesses are brought to market with realistic asking pries, seller participation in financing, transparency about the existing problems and looming threats the business faces, then prospective buyers will never garner enough confidence to get to the closing table.
Certainly as the economy improves, the number of closed deals will increase somewhat (as they say “even a blind squirrel gets a nut once in a while”) but overall, the one in five ratio will not budge much as long as businesses for sale hit the market with sellers having unrealistic expectations from the starting gate.