Is the decision to sell your business in the face of recession the right thing to do? Why do most entrepreneurs stay recession-proof? And what are the factors to consider before selling your company?
Three out of four economists in the United States predicted a recession in the year 2021 according to a publication made available in Washington Post. That’s seventy-five percent of economists. The U.S.-China trade war and slow international growth are receiving the bulk of the blame, but other aspects are at play, too.
We’ve seen a decline in consumer confidence, strange interest rate fluctuations, a rise in consumer debt and late payments, and more. These signs are typical indicators that a recession is looming. While economists can’t agree on when the recession will hit, there seems to be a unanimous agreement that there will be an economic recession in the next couple of years.
If you own a business, this could spell trouble for you. Should you sell your business before the going gets rough? Or, is it better to stick it out instead and possibly expand by buying another business? What’s the smarter option?
There’s no clear-cut answer here. So, let’s address the pros and cons of selling while the recession is looming, and figure out whether it’s time to sell your business.
Reasons to Sell Your Business in the Face of Recession
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Take the impending recession out of the equation. How do you feel about your business? Are you happy to be running it? There comes a moment in every business where the original owner is done. They’ve either lost interest, completed what they wanted to, are excited about another project, are nearing retirement age, or have a myriad of other reasons.
However, at some point, most business owners get to a place where they’re finished. They don’t have the heart to put in the necessary grind of running the business anymore. If you are at that point, recession or not, it’s absolutely time to sell.
Why? For one, the longer a burnt-out owner runs a business, the longer that business loses potential. If you aren’t the best person to run your company anymore, you’re only hurting the potential sale price. How so?
A potential buyer will look at the last few years of revenue and profit, and if in those last years you’ve been slacking, that isn’t going to be appealing. Moreover, the more anxious you get to rid yourself of the business, the more likely you are to take a subpar offer. Business buyers smell desperate sellers and will underbid, regardless of the economy.
So, if you’re already thinking about selling, it’s probably a smart idea to do it before the recession hits.
However, if you don’t fall into this category, but you just want to know what makes the most sense, there are other things to consider before you sell your business in the face of a recession.
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The Industry Matters
Most recessions last between six to sixteen months. How do your company’s books look? By that, we mean your profit and loss statement. Do you have enough put back to survive if your revenue substantially drops, or will you go belly up?
It’s important to ask yourself those tough financial questions and be realistic about your company’s long-term viability in a volatile market. The industry that you’re in is one of the most significant factors to consider.
There are some industries that experts and consumers consider recession-proof. Those are industries like grocery, medical, and auto repair. These businesses are typically essential, non-luxury businesses that people need. If you’re in one of those industries, you’ll probably do okay during a recession, if you’re not burnt out, and you’re already performing well.
Alternatively, if your company is a luxury service or in an industry that usually goes when the going gets rough, you probably won’t do as well during a recession. Does this mean you should sell and shutter shop right away?
Not necessarily. If you’re doing well now, and you have some financial cushion to get you through six to sixteen months of a recession, you don’t have to sell. Though, if your current profitability isn’t very high, you might be able to find a higher-paying buyer during or right before the recession.
Skilled buyers and wealthy entrepreneurs like to scoop up struggling companies during economic instability so that they can get a deal. If you run a company that you haven’t been able to take to the next level, the looming recession might be just what you need to find an interested buyer and turn a respectable profit.
Getting the Best Price and Buyer
You will likely be able to sell your business for more before a recession than during it. So, if you’re purely looking at numbers, then it’s smarter to get in before the economy dips. However, finding a buyer before a recession can be tough.
During the recession, it’s sort of a sellers’ market. Yes, the buyers get better deals, but ultimately, there are more buyers out there. This is because skilled, top-level employees are being laid off in large numbers, and those employees tend to buy their own businesses rather than trust another big corporation. We saw this happen in 2008 and 2009.
So, if you can’t find a buyer before the recession, you might be able to find one during the recession. But ultimately, it comes down to value. If you need more insights on how to value your business, consulting a business broker might be a good idea. You want a return on your investment for your business. So, if you try to sell your company and only get lowball offers, and you can afford to ride it out, then ride it out.
However, if your company valuation indicates that you won’t be able to weather the storm, and you’ll have to close shop anyway, you might be better off taking a lower offer than what you want. No one wants to hear that, but if your options are to make some of your money back or lose it all, the answer is clear.
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Should I Sell My Business Before the Recession?
It’s really up to you. Talk to your accountant and business partners. Take a hard look at your financial situation. Consider your industry. Figure out if your heart’s in it enough to fight through the rough waters of a recession.
If your financial situation looks gloomy and your industry isn’t recession-proof, it might be a good idea to sell your business. If you’re tired of running your company, it’s definitely time to sell. On the other hand, if you have a financial cushion and feel ready to weather some rough times, then you probably shouldn’t sell.
There are many factors to consider. Ultimately, it’s a personal choice that only you can make.