Is selling a business during a recession a good idea or a poor ROI? This is an important question for business owners to consider since selling a business early in a recession might be critical. There are certain cases where it can be profitable to sell a business during recession, but there are a few factors to consider first.
Why Sell a Business During a Recession?
Selling a business during a recession might seem like a bad idea — after all, many businesses earn less money during these trying financial times. However, selling a business during a recession may not be to worst idea.
Because many businesses lose their value or do not survive a recession, owners might get the best return on investment (ROI) from selling. The percentage of businesses that stay open declines with age, and a recession may be the final straw for a business showing narrow profit margins.
The following are a few reasons why business owners might want to sell their business during a recession:
- The business sees an increase in sales: If a business sees an increase in sales, it will be more appealing to potential buyers. For example, marketing affordable, low-priced goods will maintain their popularity in recessions as consumers shift away from more expensive competitors.
- The business specializes in necessary goods and services: If a business includes clients in the health care or education industries, business owners might experience little impact from a recession. Businesses in these industries will sell in any economy.
- The business sees an reduction in sales: Sometimes, selling a business is the best way to earn a ROI. If business owners experience a reduction in their sales, the business might cost more to keep. Owners may even have to accept a lower sale price, but this option often prevents losses from accruing as the recession progresses.
- The business was already ready to sell: If a business owner was already planning to sell their business when a recession hits, it’s usually best to move ahead as planned. Private mergers and acquisitions may react slower to recessions compared to deals with publicly traded companies. The business is will be unlikely to lose much money if it sells early.
Why Not to Sell a Business During a Recession
Concerns about financial stability during a recession are natural for any business owner. While selling a business may seem like the right thing to do when facing economic challenges, it may not always be the only option.
There are a few reasons selling a business during a recession is not a good idea:
- When fear is driving the business sale: It’s never a good idea to let fear drive any business decision, but especially not a sale. Business owners should avoid letting concerns about the economy dictate whether or not they sell — after all, a recession does not guarantee a drop in sales or value.
- When the owner is still passionate about the company: If a business owner is still passionate about the business, it’s worth sticking through some trying financial times. They may have to make some tough decisions about operations and staffing to stay afloat, but these sacrifices can set the company up for long-term success.
- When there is potential for growth: If a business owner has some capital tucked away, they might be able to convert a recession into a period of growth for the company by purchasing smaller businesses.
Factors to Consider Before Selling
There are a few factors business owners should prioritize if they are considering selling during a recession. Strengthening the management team is an important part of preparing a business for a sale. Good management can go a long way toward ensuring the successful sale of a business.
In a recession, it may be a good idea to have an appraiser conduct a business valuation. Owners should choose a market or asset-based approach in order to reduce the weight of sales dips in the valuation results. An asset-based valuation approach is ideal for businesses with most of their value concentration in specific objects or properties. The market approach focuses mainly on competitive advantages.
Revenue data from recent months and years is necessary for negotiating a sale, and it acts as evidence for positive cash flow and a health profit margin. In a recession, these traits can significantly increase the odds of a high sale price.
Organize and highlight any aspects of the business that hold a competitive advantage, regardless of the valuation method. For example, there are several benefits of AI tools and features in retail businesses, especially given recent advances in this technology. A retail business utilizing AI successfully would want to emphasize that asset during sale negotiations.
Who Should Sell a Business During a Recession?
Ultimately, whether or not a business owner sells during a recession comes down to the state of their business, the industry they are in and the niche they are marketing to. It’s usually best to sell a business early in a recession, but preparing the business for a sale is crucial. Build a stable, reliable management team and invest time and resources in assets or features that will increase the business’s value.
Devin Partida writes about investor technologies, big data and apps. She is also the Editor-in-Chief of ReHack.com.