Real estate isn’t the only asset class with plummeting prices.  Businesses are also being sold at record low prices.

According to a recent article in Inc. magazine, “A Buyer’s Market,” the median sale price for a private company fell by nearly 30 percent last year.  This is no surprise, with dwindling revenues across the board from the recession, and the rapid implications of a completely New Economy.

This represents a tremendous opportunity for those who are looking to buy a business or acquire a competitor.  Cash rich companies, who have found themselves in dying or just slowing industries, are snatching up their competitors at deep discounts.

The scarcity of credit is also pushing down prices. Businesses that no longer have access to easy credit, are dumping their businesses for pennies on the dollar.  This then forces other sellers to lower their prices. In this way, buying a business is a bit like buying a house.  Recent comparable sales can have tremendous influence on the sales price of comparable assets.

The drying up of the credit markets has also forced both buyers and sellers to get super creative in how they structure the deal.  Buyers are more commonly using “earn-outs,” to structure an acquisition.  In this scenario, the seller of the business stays “in the game” with the business for a set period of time, and thus takes a percentage of the agreed upon sales price from future revenues.  I think an earn-out is a smart move, particularly with the rapid pace of economic changes we are experiencing.  A business that made a profit for the last ten years, may not make a profit in the next two, if its business model or industry are now obsolete.  With an “earn-out,” the new business owner passes on some of this systematic risk to the former business owner.

Any comments about the plummeting prices in this asset class? Or, is anyone currently looking to acquire a competitor?

If you are curious about business valuations, I recommend taking a look at the article referenced in this blog post.

Please leave any additional thoughts & ideas!

Posted by Corey Curwick on August 30, 2009