Down Markets and Business Growth Walls

Business owners looking to sell their business need to pay attention to the markets. That seems to be a pretty obvious thing and maybe even a trite statement.

We’re working with one business which is down 20 percent, who had an offer on the table in December, and would have closed then based on trailing 12 months and forgetting the 20 percent down.

She thinks the business internally is just worth more than that and she’s decided to hold out.

The fact is her trailing 12 months is going to continue to trail down. She’s in an industry where it’s affected by the economy; a good part of it is discretionary. She probably turned down the highest price she’s going to see on that business at least in the next several years.

Regarding operating a business, it’s easy to say plan ahead, that’s obviously the advice in a nutshell, but what does that mean? It means conservative financing of the business.

The bankruptcy numbers are disproportionately high now due to those businesses that use leverage to buy a business or manage to borrow more money in the course of operating the business.

When the margins squeeze, when the business revenue cuts down 30 or 40 percent, all of a sudden you can’t service the debt.

So it’s conservative business standards, and for most business owners we don’t have to tell them that. Small and middle market business owners don’t like that trip to the bank. They only go there when they have to. They’re guarding against the excessive capitalization of the business, excessive debt in the business.

The debt in most businesses exceeds the equity. There’s nothing wrong with that, that’s normal, but it depends on how much it exceeds the equity.

Let me translate that to the equity in the private business. In small and middle market private business, family and friends was the traditional thing.

In the last up cycle, private equity groups became a dominant player. I’m pretty confident that private equity groups this year own about 48 percent of the capitalization of the mid market. And by mid market, I’m not talking about the public mid market, that’s a sliver of companies.

rahul

Rahul is a Business tips author of several publications of Marketing and experiences in life. he is a regular contributor to online article sites on the topics of Sales allover the world.

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