Is it a bad idea to buy a small-midsize business (SMB) during or Bear stock market or is it a great opportunity?
When Wall Street turns into a Bear Market, buyers for stocks of publicly traded companies hunker down, hold on to their cash, and wait for the storm to pass. Some may take extreme steps and sell off stocks they are holding to minimize their losses, create additional liquidity, or to recognize losses for tax benefits at year end and then buy in the new year. Sellers greatly outnumber buyers in a Bear Market; but there are savvy investors that realize there are still solid companies to invest in that have become great buys and they seize this opportunity to buy at substantial discounts.
The effect of a Bear Stock Market on small-midsize businesses (SMBs) depends on what is driving or causing the Bear Market. While 2018 was a wild ride on Wall Street with the Dow and S&P 500 losing nearly 20% of its value from the 2018 peak in December, small business values were not affected and in fact 2018 was a record year for small business sales and values. Overall, 2018 was a great year for small businesses.
If the stock market is going through a “correction” after prices have soared and it is simply time for the values to be realigned with their actual economic value, then this generally does not affect small business values. Likewise, if there is a reaction to global markets, oil price fluctuations, interest rate changes, or government policy changes this generally does not affect small business values. While the Dow and S&P 500 react to economic and world events seemingly instantaneously, privately held business values do not react to these fluctuations which are driven by speculation. Small business values are driven by earnings (link) and as these companies are privately held, they are not subject to investor speculation since they are held for the long term.
While small business values are not directly affected by a Bear Stock Market, a stock market downturn can cause some prospective buyers to pause and wait to see what happens. This is an opportunity for serious and savvy buyers as there may be less competition for businesses on the market and you are in a better position to negotiate on price and terms.
But what if the Bear Market is the result of an economic downturn, is it still a good time to buy a business? During the 2007-2008 recession sales of small businesses dropped dramatically and while some businesses suffered during that recession, the good ones recovered and are having record years now. The point here is that if one of these 2008 survivors was acquired at that time the company would have been purchased for a fraction of today’s value.
Even during an economic downturn there are quality businesses for sale and during a downturn they will be available for far less than what they would sell for when the economy is doing well.