Thursday, October 20, 2011

Pitfall of Waiting to Sell

Timing a business sale is never an easy task, especially in today’s volatile market. Much like the value on your home, there is often no good way of telling what the future will hold. The economy has only complicated matters as business profits, cash flow and overall values have been in a state of fluctuation for some time now.

With the recession taking a firm hold on the business-for-sale marketplace over the past few years, many owners may be asking themselves when the right time to begin the sale process will come. Will the economy rebound soon? Will that boost valuations? How will it affect the number of buyers and sellers on the market?

These are all certainly things business owners should consider and we have seen a slight improvement in the market as of late. But while some might be tempted to continue waiting a few more years for better prices, there are several issues that could cause this strategy to backfire. Here are just a couple of the possible pitfalls of waiting too long to sell your business:

A Slow Recovery
While we’ve seen a few positive signs, a full economic recovery is still a long way away. Too many owners are waiting for their businesses to spring back to the profit levels they were seeing pre-2008. But a quick fix isn’t going to happen anytime soon. Business owners who are emotionally and financially ready to sell need to start the sales process now and take the necessary steps to maximize their business value. Even if sales are slow right now, many experts have tossed around the phrase “flat is the new up.” If your numbers are staying consistent, consider that a good sign that your business will be in demand on the market.

Increased Taxes
There were many business owners scrambling to sell their assets in 2010 in fear of the expiring capital gains and personal income tax rates. The government decided at the last minute to extend those taxes another two years, giving business owners more time to enjoy low rates. But don’t take these two years for granted. Eventually, most likely in 2013, the capital gains and income tax rates will increase and the hike will have a drastic effect on your business sale. For example, a capital gains increase from 15% to 20% would increase taxes $100,000 on a $2,000,000 sale. That doesn’t include any federal or state income taxes that will be increasing and taking an even larger portion of your proceeds. So unless you can afford to lose that money or find a way to increase your bottom line, selling before another tax increase would be a wise investment.

Demand Fluctuation
This may seem contrary to most beliefs, but there are certain industries that are actually more attractive right now than they may have been a few years ago. Health care, for example, is drawing a lot of interest as baby boomers, a large chunk of our society, begin to reach elderly status. Business service and repair service operations are in demand as well as we battle our way out of the recession. In business services, collection agencies and anything debt related is selling well. During an economic struggle, consumers are also looking for their equipment to last longer, resulting in additional attention for places like auto and computer repair shops. Waiting for a recovery could lower values in these types of industries.

Baby Boomers Retiring
As mentioned, the baby boomer generation is reaching retirement age. And it is these baby boomers who own a large portion of the small business industry. What this means is that once these owners decide to sell, it will drastically alter the business-for-sale market. We’ve seen some of these boomers sell in recent years but the majority have been waiting out the recession. Whether you are one of those boomers ready to retire or their eventual competition, you’ll want to sell before the majority of these businesses hit the market. It will be tough to stand out once the market becomes flooded with similar businesses.

The truth of today’s market is that no matter when you decide to exit you business, you should already be in the planning stages. But with issues like these looming, now may be the time get things moving at a brisker pace. If you’re not getting the interest or offers you’d like, you can always pull back and work on improving the business. Waiting too long, however, could leave some prime opportunities, and profits, behind.