Counter cycle – are you brave enough?

In this blog 12 months ago I suggested that, for brave Gen-Ys, trading in the house to purchase a business may be a prudent way of switching from a passive asset to a revenue generating one. House prices were climbing to their peak and privately owned businesses were selling for record low prices.

The world has changed considerably since then. Most noticeably the Treasurer has switched from telling everyone to stop spending and looking for budget cuts, to doing the opposite. So what should the next generation of business buyers be doing now?

The next six months will present the next generation of buyers with some excellent opportunities to get into business for themselves. The economic slowdown could be a boon for them in two signification ways.

First, tougher economic times will help to sort the good businesses from the bad. It is an environment in which badly run businesses will struggle and many will fail. Although it is by no means an exact science, as a number of good businesses will also suffer through no fault of their own – the businesses that survive this journey will be in better shape for the experience, and certainly their relative strengths will be more easily assessed.

Second, profit margins will be trimmed. With many business prices hinging on EBIT multiples and earn-outs this translates into lower prices for businesses at the same EBIT ratio. For example a business with a million dollar turnover operating at a 15% margin and selling at a EBIT multiple of three, would sell for $450,000. Trim the margin back to 7.5% due to the harsher economy, and leave the EBIT multiple the same and the business is now worth half the price at $225,000. That is a very nice saving.

Of course would-be buyers are still required to fund the purchase, and in this environment they will need access to some finance. The house is likely to be part of this solution, either through its sale, or as a channel to secure funds against its value. Whichever way you look at it, bravery is required. More important than anything else though, you need to choose the right business for you.

Recent history has shown that plenty of retrenched workers will swap job insecurity for direct control of their destiny in a downturn. A significant proportion of these will start out as franchisees. Many of them will commence the next business cycle as employers.

If business ownership appeals to you, are you brave enough to make the jump, or are you waiting to be pushed?

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.