An improving economy may mean a new face behind the counter at your favorite store.
More small businesses are changing hands these days as stronger business conditions allow their owners to cash out at a better rate, and more baby boomer business owners are deciding to retire.
Last year was a record year for the sale of businesses in the United States, and 2015 is expected to be even better, according to a survey of business brokers by BizBuySell.com, an online marketplace for business sales.
The sale price of a business depends on the most recent two or three years of cash flow. In a recession and slow economy, that means many business owners decide to hold on because they don’t want to sell at depressed prices.
Brent Bressler, of Wichita-based Bressler Ventures, said he had a good year last year and is already seeing growing activity for the coming year.
“It’s demographics,” he said. “I’ve got a 78-year-old client who’s ready to go to the lake and go fishing. And sales are better, profits are better, which translates into more valuable businesses.”
Todd Bailey of Transworld, which is based in Wichita, agreed that 2015 is shaping up to be a very good year.
“We’ve had more and better listings going into 2015, and by better listings I mean healthier companies with owners who have reasonable expectations,” he said.
Buying a business
Terry Ens bought Lou’s Oil Spot, 2340 N. Maize Road, in March after a long career at Quiznos and Dairy Queen.
Ens had been getting his oil changed at Lou’s for years — and now he runs it. It’s a good business and maybe a good platform for something more, he said.
His advice to prospective buyers: Do your due diligence. Know exactly what you’re buying, and be prepared to work long and hard.
“Make sure you enjoy the industry you’re getting into because you’re going to be there 60, 70, 80 hours a week,” he said.
Mike Janzen bought Signs & Design, 4545 West Central, four years ago after he left Cessna, where he was a supervisor of industrial engineering.
He had the owner stay a month to help with the transition and was lucky to retain two employees.
Since he took over, he said, he’s been able to nearly triple sales, and now has six full-time employees and two part-time workers.
Like Ens, he advises potential buyers to check out the business as much as possible. He said he had equipment that he decided to be needed to be replaced relatively soon after he took over.
“Really get into the potential expenses,” he said. “It’s can’t be ‘Great, I got a fun new business to run,’ but ‘In six months, what will it cost me to keep it running?’”
Their youngest child
Steve Fischer of VR Business Brokers said that the biggest barrier to more sales in recent years has been psychological.
There are plenty of people willing to buy, he said, but sellers tend to overvalue their business.
In many cases, the seller started the business and ran it for years, if not decades, he said. It’s provided them with a good income over the years. They may fondly remember the good years of the 1990s or early 2000s, rather than the harder recent years.
But the selling and the buying of businesses need to be clear-eyed business transactions, he said.
The buyer is paying for the business based on how much money it’s going to make – not how much hard work and time the seller put in to build the business. There’s often an emotional attachment so strong that it may surprise even the seller.
“It’s their youngest child,” Fischer said. “We have boxes of Kleenex all over our office, and it’s not because people are sick.”
Businesses are valued on their recent cash flows. Fischer said the national median sale price is 2.3 times annual cash flow, but that varies widely on how reliable those cash flows are. And if a business comes with hard assets, that’s always considered a plus by banks when considering whether to lend, he said.
Fischer said he often gives a speech to sellers: A small business needs to generate enough cash flow to provide a reasonable wage for the owner and service the debt — and have enough left over to justify the risk.
“If it does those three things, it makes sense,” he said.
Here are reasons why experts expect business sales to increase this year:
▪ More qualified buyers are in the market.
▪ Overall, the economy is improving.
▪ More sales beget more sales. Rising business values encourage more sellers.
▪ More baby boomers are deciding to retire and sell.
▪ Although still tight, the availability of credit is improving.
Source: BizBuySell.com and local brokers