Business Values Frenzy is Subsiding

By Andy Kocemba

I’ve enjoyed baseball my entire life, though many of those years were spent watching bad Minnesota Twins teams. On occasion, when they would start the game with a big first inning, my youthful mind would love to project what type of game I was in for. “Dad, the Twins just scored 8 runs in the first! If they keep this up, they’ll win 72-0!” Of course, that never happened. Human nature and the natural ebb and flow of a baseball game always got in the way of that record setting possibility, no matter how great the first inning was.

We’ve seen an incredible first quarter of business sales in 2021. At our office, new listings, new sales, and closed transactions have all been occurring at a near record pace. Additionally, the seller’s market we’ve experienced has seen many more buyers than sellers, leading to premium prices paid for healthy businesses. Is it fair to project quarter 1 across the rest of the year? Will the “seller’s market” conditions continue to compound, sending business prices into the stratosphere? Will my company close so many transactions that I might end up buying the Minnesota Twins in 2022? Not likely, and we’re already starting to see the change occur. Here’s why:

The Numbers Still Have to Work: No matter how excited people get about buying a business, winning the deal, and beating out other buyers, the financials of a transaction still need to make sense, especially if the buyer is relying on bank financing. A buyer looking to own and operate a business will need to be able to make a healthy living, and any investor is going to require a certain return on investment. The higher the price, the more that return is eroded. And, banks always have their thresholds for risk vs. reward, which will always be a safety valve guarding against runaway business prices.
Clearer Heads are Prevailing: No one would deny the last year and a half have been tense. Virus concerns and isolation, social unrest, and business shutdowns have left many in a heightened state of anxiety. Business buyers and investors work hard to keep emotions out of deal making, but at times, business transactions were caught up in the urgency of the moment. But no matter where they fall on the issues of the day, when all is said and done, entrepreneurs are savvy people. They aren’t going to let run-away fervor force them into deals that don’t make sense, circling again to my first point.

As the fervor from quarter one dies down and people start embracing a general “back to normal” sentiment, we are seeing the market come back into a more equal balance, resulting in valuation multiples and sale prices that are in line with previous levels. Ultimately, this is good for both buyers and sellers because it creates a healthy and sustainable situation.

Takeaways

The market is beginning to stabilize and return to a more equal balance.

A balanced market is good for both buyers and sellers.

Market forces including bank loans and concerns around risk vs. reward act as a safety valve against runaway business prices.