David Newport: Deluge of businesses to hit market

In today's economy, the question of what business owners should do regarding retirement and succession planning is urgent and topical.

Many are seeking answers: my business partner Paul discussed this issue last week on Breakfast TV, and also last week, an MBA student asked for my thoughts on it for his thesis.

The truth is that most business owners lack a succession plan. Meanwhile, various industry experts are advising owners to ride out the current market dip and wait for better times before they exit.

Bearing in mind that the March 2009 ASB survey found that a full 25 per cent of business owners wish to sell in the next five years, how good is this advice?

A look at the business broker websites shows there are about 2,500 businesses on the market through brokers. This is all businesses, from corner dairies to much larger operations. Of these, around 150 have enterprise values exceeding $1 million.

Right now, there are still more buyers than sellers in the market, and a good business is achieving a multiple of 2.5-3.25 times' its net income at sale (business with enterprise value under $2 million, which is most New Zealand businesses).

This is a little down on 2007 numbers, but still a fair ROI for both transacting parties considering the market conditions. Statistics NZ says that there are 471,000 businesses in New Zealand with a turnover exceeding $30,000 (excluding farming).

The aforementioned ASB poll points toward owners who are planning for voluntary retirement, and doesn't include those who, for whatever reason, are forced to exit. That means that about 120,000 businesses could hit the market during the next five years, or 24,000 annually - more than 10 times the number that are currently listed for sale.

The question I have (remembering my high school economics teacher's explanation of 'supply and demand') is, what will 10 times more supply do to, first, pricing, and then demand?

Is it valid to ask whether a business owner exiting in the current economic downturn could achieve a better sale price now than if he waits for five years and joins the rush? I think so.

There are still more buyers than sellers, and any good business will stand out in the current climate.

A fair question on the reader's lips would be whether these are the thoughts of a business broker wanting more businesses to sell. Of course we would always like more, though things for our business are looking very good right now. I think the important distinction is that purchasers want more opportunities on the market. That has to sway the argument.

If in the current market there are about 2,500 businesses (good and bad) for buyers to fight over, they will be spoilt for choice if nearly 24,000 hit the market in the same year, as is projected. Having more buyers than sellers in the current market gives a business owner an opportunity to defend their price in the negotiations. This won't be the case if the numbers flip.

Ultimately, if you want to sell sometime in the next five years, it seems less of a risk to sell now. There are significantly more buyers than sellers, market and business confidence has improved markedly, and lenders are indicating that their appetite for risk is moderating. Or, you could hold on in the hope that things might improve, and take the chance of getting hit by the wave of baby boomers all exiting at the same time.

It is our opinion that business prices achieved in this market are only down somewhere in the range of 10-15 per cent. Is it worth taking the risk of holding on for such a small upside? We think not.

* David Newport is a principal at business sales & acquisitions firm Switch Business Ltd.