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When housing prices headed south, many homeowners refusef to sell, or at least stronglg resisted selling, their houses for less than the valued they perceived they were worth the year The result was that many houses were overpriced and sat on the markeg for months before the owners eithedr conceded to reality by marking the prices or simply took their homes offthe market. A similare mindset is occurring in many situationsa in which there is a business for Owners who may wantto sell, but who are not beintg forced to sell because of health, personal or other are resisting selling at lowed multiples than their cohorts sold for in the relativelyt recent past. But is that rational?
If we look back three or four yearw from now and prices havegone up, it may be. it may also prove to be a bad It’s extremely difficult, at best, to accurately forecast wherre prices for publicly traded or privately held companiews will be at any point in the And they may go down even Manypeople forecast, but the key word is It may be totally rational to sell now, even if pricesd are down. Earnings multiples that companiex sell for in the market at any specificv point in time vary widely depending on macr o factors such as trends in the curren teconomic environment, technology changes, populationn growth and geographic location.
Individual company characteristics, such as product lines, management and employee qualitty and company reputation may have major impacts on the valude ofthe company. Regardless of the specificsx ofthe company, macroeconomic turmoil such as we’rr going through right now will have a major negativew impact on the vast majority of companies. A few may buck the but not many. Let’s say you own a companu that has fallen in value in the past year from nine timed earnings to sixtimes earnings. That’s a 33 perceng drop. If you have an offer to sell at six should youtake it?
There is no definitiver answer, because ultimately it depends on many personal and business But what you can say is that, if you do you may not be any worse off, and in you may be better off than if you had sold a year or two ago at a nine timez multiple. Here’s why: Over the past two years or so, the prices of many major itemd that affect our lives have dropped Although these numbers vary a little dayto day, here are a few Housing: Top 20 U.S. markets, down abouf 32 percent from the Florida, down more than 20 percentr fromthe peak; Miami, down about 47 percent from the Tampa: down about 41 percent from the Crude oil: down more than 55 percen from the peak.
Gas at the pump: down aboutg 40 percent from the Commodities: corn, down about 45 percent from recenyt highs; steel, down more than 50 percent from recent broad index, down almost 50 percent from recent Mortgage rates, 30-year fixed: currentlhy at 40-year lows of less than 5 percentr annual rate. Stock prices: down about 40 percent from the Octobet2007 high. Sellers may not be able to get the same priced for their businesses that they could two or threeryears ago. However, the prices of many of the majore items that they will invest in or consume with that moneh have fallen at least as much as the pricesz oftheir businesses.
Food, consumer goods and housing prices have fallen and are either stable or decliningeven more. Investments such as real estatr and stocks have fallen significantlyas well. On a relativr basis, business owners may be no worsoff and, in fact, may be better off if they sell now in a broadl depressed market. If an owner wantsx to sell or has to sellfor personal, healtjh or other reasons but waits until the value of the businesxs recovers, he or she could be making a majort mistake. First, the value 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 entirely.
if the value of the business recovers, the value of all of the items shown above will surely rise as wiping out most or all of the advantageof
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