Why Now Is The Time To Buy A Business

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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There couldn't be a worse time to sell a business, but that makes it a good time to buy a business.

Business owners who have survived the recession are bummed out, burned out, and stressed out. They know it's not the best time to sell, and their business may not actually be listed, but if someone offered to put them out of their misery, they'd jump at the chance.

It's a buyers' market, to be sure. Why? Because:

1. Prices are low;
2. In terms of profits, there’s nowhere to go but up, and;
3. Financing is more available than you may think.

Why are Prices Low?

Small businesses typically sell for a multiple of either historical cash flow or earnings before interest, taxes, depreciation, and amortization (EBITA). For most businesses, the last three years don't paint a very good picture.

Take the neighborhood beauty salon for example. Before the recession, its average EBITA may have been $100,000 a year. Since salons typically sell for three to five times EBITA, that would translate into a selling price of $300,000 to $500,000. But luxury consumer purchases such as professional hair coloring and coifing are the first to go down the drain a weak economy. For those who've survived, it's likely been a close shave — bad news for them, but good news for a prospective buyer. For every dollar their EBITA went down, the sale price of their business has fallen three or five times more.

If you can prove to yourself that a company’s demise is primarily the result of the recession, its misfortune may be your fortune-in-waiting.

Nowhere to Go but Up

Some would see the glass half empty. An entrepreneur would see it as a glass that’s ready to be filled. Think, "ground floor opportunity.” Buying now puts you in a position to ride the upswing, when it comes.

Unless something fundamental has changed, such as a popular salon chain moved in across the street, you should be able to look at a company’s pre-recession performance and have a reasonable expectation that it will return to that level when the economy improves.

The fact that the business has survived at all says a lot for its staying power.

Financing is Available

You’ve no doubt heard that business financing is impossible these days, but the truth is banks do want to lend and investors do want to invest. After all, that’s how they make money. The SBA is particularly eager to help foster economic recovery within the small business sector.

There’s also the fact that buying a business is generally considered less risky than starting one.

If you can convince a financier that the business is intrinsically solid, they’ll be eager to be a part of the deal. To do that, you’ll want to create a proposal that, in addition to all the standard elements, includes:

• A summary of the company’s performance for two or three years prior to the recession along with actual financial statements or tax returns that validate the summary numbers.
• Data that shows this company’s demise is typical of the rest of the industry. Professional associations and IRS industry statistics are good sources of this information. With the IRS data you can chart how the industry performed during and after the to the last recession. (see Ten Free Sources of Industry Financial Data)
• Any indications of improvement in the business or industry such as month over month or year over year sales increase.
• Any evidence that your expenses are likely to be lower than the existing owner’s were, either before the recession or now. Perhaps they were an absentee owner and you’re going to be hands-on. Or maybe the existing owner has recently negotiated better lease terms.
• A roundup of local closures of similar businesses over the last few years. This will show a lender or investor two things. First, that this salon fared better than others and is therefore proven that it has some basic advantage (i.e. location, customer loyalty, brand recognition, etc.). And second, that as the economy recovers, the business will face less competition.
• Two years of cash flow projections with detailed assumptions. Lenders and investors always want to see projections, but they’ll but they’ll be particularly important if the venture you’re purchasing does not show historical cash flow sufficient to cover the proposed financing.
• A good story about your qualifications and how you plan to shepherd the business back to profitability.

And if running a hair salon isn't your thing, there's bound to be something else available that is. There's no time like the present to make the most of the opportunity.