The latest BizExchange Index, to be released next week, provides some interesting insights into the state of the market for privately owned businesses in Australia.
Many people may be surprised to know that for calendar year 2008, private business values held up better than their listed counterparts. Part of the reason for this is that the private business market is less volatile and began falling earlier.
As can be seen in the graph below, the value of businesses has been in general decline since 2006 due largely to the dramatic increase in the volume of businesses for sale during the same period.
The other key insight is that business owners are not prepared to sell their businesses at any price. There are many choosing to either hang on to their businesses, or wind them up rather than, in their eyes, give it away to someone else.
This has effectively put a floor under the business market at current prices despite a plunge in market expectations (see graph below).
This graph represents the response of BizExchange members to the survey question “Do you expect the value of private businesses in the next three months to: Increase, decrease, stay the same, don’t know?”. This is the most negative it has been since it began in September 2006.
This differential in price expectation, combined with the credit crunch as a result of the global financial crisis, has resulted in a substantial reduction in actual sales during the period according to a number of business brokers and advisers contacted by BizExchange.
A key to the future direction of the market will be whether buyers will be able to finance the asking price, and also whether sellers will be able to maintain their current earnings. Neither of these things is certain going forward, and both will be major drivers of future prices.
If you would like more information on the findings, a concise version of the BizExchange Index is available free of charge from www.bizexchange.com.au, the professional edition and detailed reports on particular industries are available for sale from www.valuemybusiness.com.au
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.