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Selling a business: sales process taking longer

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It is taking longer to sell a business because of a gap in the pricing expectations of buyers and sellers, suggests a survey by BusinessesForSale.com.

The poll, which canvassed the views of business buyers and sellers and business brokers from around the world in the first quarter of 2010, suggests that many buyers and sellers are feeling similarly bullish for contrasting reasons. It revealed a widespread perception among prospective buyers of a buyers' market where a deep, protracted recession has left an abundance of businesses struggling to survive with owners desperate to exit amid continuing economic turbulence and prepared to accept low prices.

Meanwhile, however, many sellers say they are prepared to wait for an improvement in the economy rather than selling at the bottom of the market.

Sales cycle

With so many buyers looking to seize on weakness among vendors but the latter in no rush to sell, it's perhaps not surprising that 55% of brokers and business transfer agents reported a rise in buyers withdrawing from deals, against only 26% witnessing a fall and 20% saying there was broadly no change.

The economy is at an impasse, where a nascent recovery could either gather pace or advanced economies could fall back into recession as public spending cuts bite

Jeremy Mandell, Dynamis head of marketing

This also helps to explain why an overwhelming majority (97%) report that the sales cycle is taking longer than before the 2008 financial crash, with 43% saying it was "taking significantly longer" to sell a business. In 2008, 12% of business brokers said it took less than four months to sell a business, compared to 2% today.

This suggests that buyers and sellers are taking longer to reach an understanding over price and in an increasing number of instances, can't reach a compromise at all. Any notion that a deterioration in the credit situation has stymied deals is undermined by the revelation that roughly the same amount of buyers finding it easy to obtain credit as those who believe it's difficult, 28 and 26% respectively, while 54% believe there has been no change.

What the survey instead suggests is that prospective buyers anticipate plenty of bargain business opportunities, whereas vendors have experienced a growth in buyer interest - enquiries have soared from 49,600 in March of this year to 83,300 in April - and will often be emboldened to hold out for their asking price.

Eighty-six percent of would-be buyers believe it's a good time to buy, about half (49%) of whom believing so because the uncertain economic climate promises low prices.
Sixty percent of buyers nevertheless found that in reality sellers' asking prices were too high, while only 37% felt they were about right. Meanwhile, only 21% of business brokers reported that their clients realised their initial asking price. 

However, brokers were on average expecting their existing clients to have a better chance of realising their valuations, with about 30% believing that on the whole they'd have their asking price met, suggesting sellers were finally becoming more realistic in their demands.

Nevertheless, 65% still believed they'd have to drop their initial asking price, which suggests that many sellers aren't heeding their broker's advice on valuations because they have an inflated perception of their own business's worth. Eighty percent of brokers believe that sellers are generally willing to drop the price when their initial valuation doesn't result in a sale.

Jeremy Mandell, head of marketing at BusinessesForSale.com, believes that economic uncertainty is at the root of an apparent mismatch in buyer and seller expectations:

"The economy is at an impasse, where a nascent recovery could either gather pace or advanced economies could fall back into recession as public spending cuts bite. It's possible that the uncertainty is causing buyers and sellers to interpret the economic outlook in two, almost diametrically opposed ways, choosing the version that suits their agenda.

"Many buyers believe an anaemic recovery and fiscal problems in advanced economies add up to an inauspicious picture, while vendors can just as easily point to a strong recovery in emerging economies and a return to global growth as reason not to rush into an exit. These owners have steered a course through the worst downturn since the 1930s and they're still standing. Why now, they could reasonably ask, should they sell at the bottom of the market and allow new owners to enjoy the fruits of their efforts as the market rebounds?"

Another factor causing sellers to hesitate is illuminated by the comments of one of the brokers surveyed: "Extremely low interest rates deter business owners from selling their businesses as they can nowhere near replace the income they derive from their businesses when they come to investing the capital in the proceeds of sale." Thus, the interest-rate factor could lead many vendors to either demand a high price or wait until the climate becomes more judicious.

Another broker predicts that "vendors will become more demanding" but warns that they "will have to be prepared to take guidance from those who know the market."

Asked which sectors they'd seen the biggest drop in sales, brokers and business transfer agents most frequently cited retail and leisure, 36% and 33% respectively reporting a drop in activity. There's a clear discrepancy with demand here because these sectors are very much in demand among buyers, as 29% and 25% respectively are interested in retail and leisure businesses. Evidence points to a shortage of quality businesses in these sectors and a pronounced disparity in expectations.

The average budget of a business buyer is £208,000, while the average price of a business is £598,000, so in an (admittedly crude) sense, many buyers don't tend to have the financial means to meet seller expectations.

Baby boomers

There is evidence of a confluence of baby boomers entering the marketplace on both the buying and selling sides. Nearly two thirds (62%) of business buyers are in the 35-54 age range, while a third (33%) are between 45 and 54.

Baby boomers are cash- and asset-rich; the wealth gap between the young and older generations is as wide as it's ever been. The average budget of prospective buyers below 45 years of age is 45% smaller than the budget of those aged over 45, £144,000 against £260,000. Thus, one could surmise that buyers on average will be better able to meet vendor price expectations as increasing numbers of baby boomers hit retirement age.

Moreover, says Jeremy Mandell, there could be fewer bargain seekers: "Would someone seeking a reliable income source and to scale back their working commitments during retirement - as many over 55 buyers in the survey indicated - really want to take on a poorly performing business in the interest of getting a bargain and shoulder the burden of turning it around?"

Retirement is an increasingly common factor behind business sales. It was cited by 58% of business brokers and transfer agents around the world as the most common or second most common reason for businesses being put on the market. It was the second most common reason given in the seller survey, cited by 24% of respondents.

Retirement could conceivably become the most common factor as more boomers reach their mid 60s, resulting in a flood of new businesses on the market, which will apply downward pressure to prices.

However, a surge in retirement sales also represents a countervailing factor affecting prices, as Mandell explains: "A business being sold because of retirement will invariably be a more successful, robust business than one sold because the owner has realised he's not suited to the industry or performance has been disappointing (cited by 7% of sellers).

"As time goes on then, and more baby boomers look to exit, expect a deluge of mature businesses with solid customer bases and good reputations - and these will command high prices. Those simply selling to buy another business or looking to exit because the business is struggling are generally more impatient to sell and therefore more flexible on price."

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