As I am writing this morning, I am thinking about several retail businesses that have recently shut their doors, mostly due to the downturn in the economy. I represented a few of them as a broker so I am aware of the details and reasons behind their closings. The largest single reason is under capitalization in a bad economy. And to a company, they opened when the economy was good and prospects were high. This included large scale build-outs and high rents. When the economy turned in late 2008, and progressed downward into 2009, customers curtailed their buying habits which remain tight today. So the businesses that have closed are the ones that had debt, high rent and catered a discretionary product or service. Recovery demanded staying power (capital) and innovation (renegotiating leases and new marketing campaigns) in an uncertain economic environment.
I am now seeing other businesses lower their asking prices for many of the same reasons. And while they are not shutting their doors, their motivations to sell are increasing as the economy decreases. some will be able to hang on and others will not. So the question is:
Is now a good time to acquire a business while the asking prices are going down and the sellers are becoming more motivated to sell? Well the answer to that depends on a few things.
- Where is the economy going?
- How much operating capital is needed to succeed?
- When will discretionary become necessary?
- IS THE GLASS HALF FULL OR HALF EMPTY?
Being the eternal optimist, I see a lot of opportunity out there for buyers willing and ready to jump in with enough capital to keep debt low, the ability to renegotiate rent rates and the marketing savvy to innovate and attract new customers . Pricing multiples are coming down and when the economy turns north, the businesses will be poised to do very well.
So is it a good time to buy a business? Is your glass half full?