Although demand for petroleum is up, U.S. stockpiles of oil surged by nearly 13 million barrels during the third week of January--a sign that lower oil prices may be more than a momentary blip on the nation's radar.
With oil trading below $50 a barrel, economists are scrambling to determine the fallout of declining energy prices on the U.S. and global economies. But as a business seller, you should also consider the effect that lower oil prices will have on the sale of your company.
The Impact of Today's Oil Prices on Business Sales
The good news is that most small businesses are poised to benefit from lower oil prices--benefits that generally translate into a stronger selling position for owners planning to list their companies in the near future.
But while the majority of small business owners are basking in the glow of lower fuel and energy costs, today's prices are not a boon for all businesses. In fact, current oil prices may actually make it more difficult to sell businesses located in certain industries or markets.
Falling gas prices are clearly a factor behind consumer's improved economic outlook. In January, consumer confidence reached the highest level in seven years. Even though orders for durable goods dropped in December, most economists see rising confidence as a sign that consumers have more disposable income and are ready to increase spending in 2015.
In most industries, increased consumer spending means improved business revenue. So it makes sense that many small business sellers will benefit from higher revenues this year--a variable that will help improve their top line revenue trends and strengthen their financial statements.
Lower Operating Costs
The flipside of lower gas prices is lower operating costs. From shipping expenses to the cost of the raw materials, low fuel prices will help business owners manage and reduce expense lines in 2015.
Combined, higher revenues and lower costs will generate improved earnings for companies in the business-for-sale marketplace. Consequently, we will likely see a bump in asking and sale prices, primarily due to valuations based on earnings multipliers.
Industry or Regional Concerns
A recent survey by the National Association for Business Economics showed that 18 percent of businesses expect a negative impact from declining oil prices--reflecting the percentage of industries that directly benefit from oil and natural gas sales.
From small energy companies to companies that provide equipment, services, or distribution to oil and gas providers, businesses in the energy sector will inevitably experience reduced earnings and thus lower valuations. For sellers in these industries, the smart move may be to delay listing until prices rebound.
Certain regions of the country could also be affected differently by oil prices. For small business owners in areas with a heavy energy focus such as Texas or North Dakota, sales could suffer if the industry isn't growing. This impact would not be as immediate but something owners should consider if oil prices remain low for a prolonged period of time.
In fact, today's oil prices make timing an important concern for sellers across all industries since profitability may decrease as oil prices rise. Depending on your business model, it's possible that the increase in earnings you achieve this year could evaporate next year.
Although the risk of reduced profitability may not be enough motivation for you to pull the trigger on a sale now, oil prices are a factor worth considering as you plan your exit from your company.