Great time to buy – if you can find the cash
Wednesday, June 4, 2008/
We are currently experiencing a once-in-a-lifetime opportunity to buy good businesses at a good price. But getting funding is not easy. ANDREW KENT
By Andrew Kent
Gen-X and Gen-Y are accustomed to finding themselves on the wrong side of the baby boomer wave, and often complain about arriving in the residential property markets after the boom, ditto the sharemarket. But the business market presents a different scenario. Literally a once-in-a-lifetime opportunity is currently in play in which genuinely good businesses are selling for very attractive prices.
The simple reason is that the “forever young” baby boomers have not planned for their retirement, and so find themselves unprepared for the sale of their business. This, combined with the sheer number of baby boomer business owners, is resulting in an unusually large number of businesses being presented for sale. The simple laws of supply and demand are for once working in favour of the post baby boomer generations resulting in significant downward pressure on business prices.
Unfortunately there is a hitch. The business loan market has tightened considerably in the wake of the US sub-prime credit crunch and the fiscal squeeze from the Reserve Bank. So while there is good buying to be had, the challenge for the next generation of business owners is finding a way of raising the cash.
Part of the problem in establishing a loan is that most businesses no longer have significant “bricks and morter” style security, and so the banks can find it difficult to meet their internal minimum asset security requirements. While business valuation and cash flow can be used to offset this concern, the banks are also aware that privately owned businesses are not a liquid asset, (on average it takes six months to sell a business), and with prices falling they are prepared to loan against a lower percentage of the valuation.
Frustrated potential business owners and current owners on the cusp of retirement may benefit from leaning on their local federal minister to see if they can find a way clear to allow personal superannuation to be used to purchase a private business. Until this happens, expect business prices to continue to fall – robbing two generations of entrepreneurs of a better financial future.
Andrew Kent is a director of BizExchange, an independent marketplace for business for sale or seeking investment. BizExchange has a directory of independent advisers and business brokers and information on valuations.
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