What does the Unemployment Rate have to do with Business Sales?

By Andy Kocemba

As we wrap up 2019, it’s fun to look ahead and try to anticipate what’s coming in 2020. In the world of business sales, one indicator we keep an eye on is the unemployment rate. Did you know it can have a strong impact on the sale of businesses? While I’m not smart enough to predict with certainty whether the unemployment rate will increase, decrease, or hold steady (and haven’t yet found an effective crystal ball in my price range), I can interpret how business sales will be impacted should either of those outcomes occur.

Unemployment Rate Increases: While it might sound contradictory, the accepted indicator of a downward economy is a good sign for the sale of privately held businesses. When talented people are struggling to find a job, buying a business becomes a viable option. Those buyers will become less picky, and may be willing to buy a business they might not have previously considered. They will also be more comfortable taking on a certain amount of risk and debt to earn the profits that business generates. While the idea of “buying a job” might not appeal to everyone, to those in need of income who can also see the upside of being in business for themselves, buying an owner-operated business can be the opportunity of a life time. For sellers, this can add up to an increased pool of buyers, more competition to buy their business, a higher price and a faster sale.
Unemployment Rate Decreases/Holds Steady: This is basically where we’ve been for several years. If people want a job, they can get one. What this means for selling businesses is that buyers are going to be pickier. As potential buyers are evaluating businesses to purchase, they will also have the option of employment opportunities in their back pocket. This will cause them to be pickier about what they get in to. They will need to love it, and the benefits will need to be worth the risk. It’s harder to get a buyer to take the leap and buy a business - taking on debt in the process - when they can easily get a job that provides the same benefits package without the risk. Don’t get me wrong, the standard rules of business sales still apply in this environment (cash flow is king, infrastructure increases value, reputation improves marketability, etc.), but sellers needs to make sure their business is near the top of the heap of all the opportunities out there in order to get top dollar from a qualified buyer.

Takeaways

There is a strong link between the unemployment rate and the sale and purchase of businesses.

An increasing unemployment rate is actually good for business sales.

Regardless of the unemployment rate, quality businesses will still be able to find an interested buyer.