Business sale prices fall as entrepreneurs accept low prices to exit

The number of businesses for sale might have edged down from lofty heights, but sale prices remain depressed, with online marketplace BizExchange saying most businesses are changing hands for less than two times operating profit.

“The economy is not nearly as good as the people in Canberra think it is,” says BizExchange chairman David Bird. And he reckons the next six months will be “pretty ordinary” for sales, as the European debt crisis and uncertainty over Australia’s political leadership continues.

“People are just cautious, and the trouble with that is it tends to be self-fulfilling and prices go down.”

Releasing its index of private business values for the December quarter, BizExchange says although high-end businesses can afford to wait out the difficult economic conditions, small businesses can’t afford to be that patient and are accepting low prices to close a deal.

The problem is an over-supply of small business married with a lack of buyers, and the inability of prospective buyers to get credit.

Prices for mid-market firms – those with between $5 and $15 million in revenue – are also weakening due to poor demand.

“The number of listings with an EBIT [earnings before interest and taxation] ratio value less than one has doubled in the last 9 months and is now 40% of all listings,” the company says.

By contrast, the slight fall in listing volumes is “almost exclusively at the high end, so that three out of four listing have EBIT ratios below two.”

BizExchange says the high number of micro businesses for sale might “signal the arrival of the major wave of business for sale as a result of baby boomer business owners moving into retirement.”

The company says the rebound in market sentiment in the second half of 2009 is looking “more like an aberration” and warns business-owners heading for the exit to prepare themselves for a tough sale.

“With uncertainty in the global economy and depressed retail sales locally undermining business confidence, finding a business buyer will continue to be a major challenge,” the company says.

“Attracting enough buyers to generate some actual competition for a business will be a major achievement.

“Micro business owners looking to retire may be surprised by how little their business is worth.

“Many may find it more financially rewarding to recruit a gen-x or gen-y partner and invest in their development with a view to a more gradual transition of responsibility and ownership.

“Others are simply continuing to work for as long as they can.”