Sell when the market is high and buy when the market is low – that’s what they say. And it’s certainly true when it comes to buying and selling a franchise business.
Right now the experts are telling us it is a buyer’s market, in particular for real estate. But is this also true for business? I say definitely – and here’s how to tell.
Gauging Market Sentiment
As a business broker with years of experience buying and selling businesses, I can easily identify a buyer’s market. From my observations of what prices are doing and what the market sentiment is, I can confidently tell you that the business market has never been more in favour of buyers – well, not for a long time anyway.
For the person on the street, however, it is not so simple to gauge market sentiment around the buying and selling of businesses – not like it is for real estate. These days anyone with a computer can find out what real estate in a particular area previously sold for and what prices are being achieved now. There are comprehensive databases that collate and update this information.
For the business market this doesn’t exist. Sale statistics for businesses are not tracked like those for real estate, so there is no easy way to see if prices are rising or falling over time. To determine whether it’s a business buyers or sellers market, you need to dig deeper for evidence.
Characteristics Of A Business Buyers Market
There are three main characteristics of a business buyer’s market:
- Prices are significantly lower than in a normal market.
- Sellers are willing to sell for a lower price and accept your conditions.
- Buyers are willing to buy and have the ability to fund the purchase.
However, just because the market is in your favour as a buyer, the banks may not be. Finance, for example, can become harder to obtain in a buyer’s market. Right now the banks are generally not as willing to extend themselves past their normal risk profiles, so you will need to have a good credit record and a strong equity position to be in a position to take advantage of the bargains around at the moment.
Further Clues
The best way to get an idea of business market conditions is to review ‘business for sale’ ads. Look at the language being used in them. Headlines such as “Owners must sell now!” and “Price reduced for a quick sale” start to permeate through advertisements when conditions favour buyers over sellers.
In a buyer’s market, you’ll also notice that business brokers are pushing businesses a bit harder and making comments like:
- “This is a great price.”
- “The price has been reduced as the owners want to sell and are prepared to negotiate.”
- “This business is selling for less than the set up cost.”These are sure-fire signs that sellers are anxious to sell, as opposed to being confident of a sale. Buyer Beware
In a buyer’s market, you still have to be careful. If a seller wants to sell quickly (i.e. for a lower price), you need to ascertain why this is the case. Perhaps the business is making a modest profit, or not making a profit at all. Maybe the seller has over capitalised and now can’t afford to repay their loan.
These are primary reasons why sellers reduce their price to sell – just make sure you do your due diligence and get all the facts. You don’t want to end up in the same boat as the seller was a few months later!
Remember, good businesses with good profits will always be in demand and sell for their true value no matter what the market is doing. (Once you become a business owner, it is imperative that you work on your business so when your time comes to sell you will have a good business that will be in demand.)
You Can Do It!
If you are looking to buy a business soon, this is a good time. Prices are low and sellers are keen. Just be prepared to negotiate hard and then work hard when you finally get into your business. Good luck!
Written by Len Ferguson
