Does the unemployment rate affect the value of my business?

This is a complex issue, and several factors and variables must be taken into consideration to properly assess the impact a change in employment rates may have on the value of your business.

Factors and considerations to keep in mind:

High unemployment rates mean more people are unemployed and are potentially looking to buy a small business.

This is a significant factor in the sale of small businesses. If you have a small business, a high unemployment rate means there are many more buyers in the marketplace who may be willing to buy a job (i.e., your business). The majority of people who buy small businesses are ex-corporate executives or people who are escaping the corporate world. The best time for them to consider buying a business is when they have a lot of time on their hands, have few career options because jobs are scarce, and do not have a cozy job that they fear walking away from. The situation is even better if the buyer recently received a severance payout.

If you own a small business, high unemployment can mean there are more buyers in the market, and it may be easier to find the right buyer.

If the bottleneck in your business is finding talent, then a low unemployment rate may damage the value of your business.

In some economic cycles, the limitation for businesses is finding talent. In these cycles, many businesses cannot find skilled talent at a reasonable cost, and they may have trouble growing as a result. While it might be possible to conceal this fact from a buyer, most sophisticated buyers will discover this eventually and will be more cautious as a result.

If your business struggles with growth because it’s in a talent-driven industry, low unemployment will only make this more of a challenge when selling your business.

Sophisticated buyers consider a high unemployment rate as a warning sign.

Unemployment rates are a lagging economic indicator. Most sophisticated investors view an increase in unemployment rates as a sign that the economy is worsening and remain cautious — that is, unless you are selling a recession-resistant business.

If you are expecting to sell your business to a sophisticated corporate buyer, a high unemployment rate can mean you have more difficulty finding the right buyer.

A scarce talent market encourages acquisitions or aqui-hires in some industries.

If low unemployment rates have caused a scarcity of talent in your industry, organic growth may become difficult. As a result, competitors may resort to inorganic growth or growth via acquisition. In industries in which talent is especially scarce, this may take the form of a so-called acqui-hire, in which the acquirer purchases the company with the primary objective of obtaining the talent at the acquired company.

A low employment rate can drive some large companies to acquire smaller businesses in order to acquire their talent, which could make it easy to sell to the right corporation or competitor.

If your wages are high as a percentage of revenue, a decrease in unemployment rates will hurt your business.

Consistently low unemployment rates tend to lead to increasing wages over time. If this happens in your business, wages as a percentage of revenue will increase, which will result in decreased earnings and a decline in the value of your business.

If your business is payroll-heavy, a low unemployment rate will cause a dip in the value of your business; therefore, a market with higher unemployment may be a good time to sell.

For example, if you own a business with gross revenues of $10 million per year, EBITDA of $1 million per year, and your payroll is 30% of revenue ($3 million per year), a 10% increase in wages (to $3.3 million from $3 million) will cause a 30% decrease in your EBITDA ($1 million – $300,000 from increased wages = $700,000 EBITDA).

Let’s assume you could receive a 4.0 multiple for your business if the unemployment rate is 8%, and a 3.5 multiple if the unemployment rate decreased to 4%. Here is how the change would impact your business:

• Before: $1,000,000 EBITDA x 4.0 Multiple = $4 million value of business
• After: $700,000 EBITDA x 3.5 Multiple = $2.45 million value of business
• Result: a 39% decrease in the value of your business
• Note: This level of impact would only be seen in businesses in which payroll constitutes a significantly high percentage of revenue.

Here are common averages for wages as a percentage of revenue by business or industry:

• Retail: 20% gross revenue
• Food & Beverage: 30%
• Auto Repair: 27%
• Bars: 28%
• Coin Laundries: 18%
• Construction: 5%
• Adult Day Care: 48%
• Dentists: 38%
• Wholesale/Distribution: 17% to 25%
• Trucking (Long-Haul): 25%
• Franchised Food: 19 to 20%
• Fitness Centers: 33%
• Gas Stations: 4%
• Home Health Care: 52%
• Hotels & Hospitality: 24% to 30%
• Landscaping: 31%
• Manufacturing: 10% to 20% (varies based on specialty)
• Marinas: 24%
• RV Dealers & Parks: 10%
• Self-Storage: 12%
• Supermarkets: 10%
• Technology Services: 20%
• Towing: 34%
• Urgent Care: 30%
• Wineries: 11%
• Med Spas: 51%
• Moving: 22%
• Nursing Homes (Skilled): 41%

High unemployment rates dampen the value of consumer businesses.

If you have a business that caters to consumers, such as a high-end retail store, an increase in the unemployment rate will negatively affect the value of your business, especially if the trend is expected to worsen over time. For example, if you own a chain of jewelry stores, a high unemployment rate will indicate the economy is not doing well, especially if your products are highly discretionary. Low consumer sentiment will only serve to make this situation worse.

If your business is in a trendy or luxury industry that caters to consumers, a high unemployment rate will cause a dip in the value of your business; therefore, a market with lower unemployment may be a good time to sell.