How fast will the value of your business return to the levels prior to the recession?

June 19th, 2009
The last 6 to 12 months have been difficult for many businesses. Some have gone out of business, others who were large enough were able to reduce the quantity of people working for them significantly so that they were either break even or marginally profitable. The majority of companies have witnessed had significant erosion of their profits. Typically, when a buyer looks for a business, they like to see a three year history to see if earnings are sustainable and they were not the result of a one time contract. If there was one bad year, sometimes you could explain that to the buyer and he would look to the current year and the year prior to the bad year. This recession has changed a lot of things and i believe that business is now conducted differently than it was two years ago.

Will you be able to explain away one bad year or will the buyer now look at your current revenue. Clients two years ago may have closed down, reduced their business, is that a good indication of the business in the future, I do not believe so. As a result, buyers are going to want to look at revenue and expenses based on the new model – from the year 2009 and forward. If the profitability is weak for 2009 or it increased in the last 3 months of the year, it may not make a large difference on the entire year because of 9 poor months. That will mean that the first good year or earnings in the “new era” will be 2010. People will want to see if you are able to sustain or grow the business therefore they will want to value the company based on revenue for 2010, 2011 and possibly 2012. You will not be able to complete the financial statements until 2013. If it takes 6 to 12 months to sell your business, you may have to wait until 2014 until the sale of the business is completed. That is 5 years from today. If you want to retire within that 5 year period, your business may not be worth what you thought it was 12 months ago and it probably will not recover to the levels which you would like within the 5 year period.

There will always be exceptions to the above. The question will be if you want to retire within the next 5 years, when do you list your business for sale, in 2009, 2010, 2011,2012 or 2013? The longer you wait, if revenue and profits go up, the better your price will be but if revenue and profits are flat, will it make much of a difference between any of those years, probably not. The best time to leave is when you want to leave. If you no longer love what you are doing, staying in the business for another 4 years to get another $100,000 purchase price – is it worth the wait? Some will say yes, others will disagree.

Filed under: valuation of a business — Gary Landa @ 8:46 am