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When housing prices headed many homeowners refusedto sell, or at leasyt strongly resisted selling, their houses for less than the values they perceives they were worth the year before. The result was that many house s were overpriced and sat on the markert for months before the owners either concedexd to reality by marking thepricees down, or simply took their homes off the A similar mindset is occurrinhg in many situations in which there is a business for sale. Ownersd who may want to sell, but who are not beint forced to sell because of personal orother forces, are resisting selling at lowefr multiples than their cohorts sold for in the relatively recent past. But is that rational?
If we look back threwe or four years from now and pricesa havegone up, it may be. it may also prove to be a bad decision. It’ds extremely difficult, at best, to accurately forecast where pricezs for publicly traded or privately held companiesx will be at any point in the And they may go down even Manypeople forecast, but the key word is ”accurately.” It may be totallty rational to sell now, even if pricees are down.
Earnings multiples that companiess sell for in the market at any specifidc point in time vary widely depending on macrlo factors such as trends in the current economic technology changes, population growth and geographic Individual company characteristics, such as product lines, management and employee qualitg and company reputation may have major impacts on the value of the company. Regardless of the specific of the company, macroeconomic turmoikl such as we’re going throug right now will have a major negativwe impact on the vast majorityof companies. A few may buck the but not many.
Let’s say you own a companuy that has fallen in valued in the past year from nine timezs earnings to sixtimes earnings. That’ss a 33 percent drop. If you have an offefr to sell atsix times, should you take it? Thered is no definitive answer, because ultimately it dependsz on many personal and businesz factors. But what you can say is if youdo sell, you may not be any wors e off, and in fact, you may be better off than if you had sold a year or two ago at a nine timew multiple. Here’s why: Over the past two yearsx or so, the prices of many major items that affect our lives havedropped precipitously.
Although thesre numbers vary a little dayto day, here are a few Housing: Top 20 U.S. markets, down abougt 32 percent from the peak; Florida, down more than 20 percent fromthe Miami, down about 47 percent from the Tampa: down about 41 percent from the Crude oil: down more than 55 perceny from the peak. Gas at the pump: down about 40 percent from the peak. corn, down about 45 percent from recenr highs; steel, down more than 50 percent fromrecent highs; broad index, down almost 50 percent from recent Mortgage rates, 30-year fixed: currently at 40-year lows of less than 5 percenft annual rate. Stock down about 40 percent from the Octobedr2007 high.
Sellers may not be able to get the same pricew for their businesses that they could two or threeyearss ago. However, the prices of many of the major item that they will invest in or consume with that moneuy have fallen at least as much as the prices of their businesses. Food, energy, consumer goods and housinbg prices have fallen and are eithed stable or decliningeven more. Investmentds such as real estate and stocks have fallenh significantlyas well. On a relativew basis, business owners may be no worseoff and, in may be better off if they sell now in a broadlyu depressed market.
If an owner wants to sell or has to sell for health or other reasons but waits until the value of thebusiness recovers, he or she coul be making a major mistake. First, the valuwe of the business may not recover for a long if ever. If the reason for selling is, say, health-related, it may be too late Secondly, if the value of the business recovers, the valuew of all of the items show above will surely riseas well, wiping out most or all of the advantages of waiting.
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