Is now the time to buy a business?

Everyone accepts that there are economic cycles, but many act as though the current trend will continue indefinitely.  The investment adage of “buy low and sell high” appears to have few followers who actually act on this. Far more popular seems to be doing the same as everyone else – which in recent times means buy on the way up and sell on the way down.  

 What we are starting to see in the market is a growing number of people who think that the bottom of the cycle is not too far away, and are prepared to make some long-term investments.

This is very sensible given that not only are the price earnings ratios at near record lows, but also the earnings themselves are low.   So the business value is a low multiple of a low number.  This represents a great opportunity, providing you take a long term view.  The key question then becomes how long will the current economic downturn last?

The economy tends to turn very differently at the peak and the trough.  As it approaches the peak it tends to spike up as irrational exuberance and over-confidence push things past their logical limits. 

This tends to burst suddenly as people who have bought into the bubble are financially exposed; this also has a flow-on effect to those that were exposed to them.  The downturn then kicks in as people and businesses cut back to must-have activities, while they wait for the worst to be over.  

The longer this goes on, the worse things get – that is, it can spiral down.  With this in mind, most people generally wait until there are clear signals that the worst is over.  At which point economic growth starts accelerating again.  

So the top spikes while the bottom tends to drag.  This brings us back to predicting how long it will be before things get better.

So far we have had the spike, the bust, the downturn, and we have entered the waiting game.  The good news here is that we are getting mixed messages, which is generally a signal that things are about to turn. 

There are a number of indicators in the US that suggest things are improving.  Governments the world over are touting gloom and doom as they pour vast sums of money into the economy – simultaneously squashing consumer confidence as they try to buy consumer activity. 

The media and the public are starting to tire of the economic gloom as a story, and may soon stop listening to the politicians, who will then start talking about something else as well.  So we are definitely near the bottom and probably in 18 months from now we should be able to look back and identify it.

But the question for business buyers is can you afford to finance your business purchase and its short term future?  If the answer is yes, then now is the time to buy if you want to take advantage of the counter cycle.

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.

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