I wrote a post last August about trends we’re seeing in the business sales market. The macroeconomic factors related to interest rates, recession threats, job and stock market volatility had not yet taken hold at that time. At the time, as emphasized by the industry experts I interviewed, the trends were still quite positive. Lenders were busy, so were brokers and advisors, deal flow remained strong, interest rates didn’t weigh down on activity, so overall things were going well.
In general, the lower market lags the mid/higher markets in terms of macroeconomic trends. My position then was “it’s coming”, and yes, indeed, in these times, just as it has been in similar historical times in the more than thirty years that I have been in the business for sale industry, it can be a be an incredibly opportune time to take over a company.
We’re not exactly at the point where the blood is flowing in the streets. However, what happens is that there is significant contraction everywhere. Lenders are tightening. Many companies experience declines, which in turn causes lenders to wait, or the market itself to lower company valuations. Higher interest rates scare off many potential buyers (I’m not sure why, as I’ll discuss shortly). Average consumer confidence declines, and when that happens in large numbers, the market for things for sale implodes. Again, we’re not there yet, but we’re getting there.
Let’s look at some of these situations and how a willing and knowledgeable business buyer can take advantage of the market.
Banks are less flexible – there is a better place to find the money
We see larger deals with significant seller financing to bridge the gap between outside lenders and the equity buyers put into the deal. This has not always been the case in the past. Generally, the larger the deal, the lower the seller financing percentage, if any. This is good for both sides. A seller can now help to close the deal instead of not closing it because the buyer can’t make enough use of it. For buyers, this is an additional source of financing that gives them more flexibility with deal terms and covenants.
Interest rates – forget about them
Rates of zero or below a few percent are long gone. Bye. Never mind. They don’t go that low fast. Buyers concerned about rates are focusing their attention on the wrong things. Yes, the increased rates affect ROI and leverage, but so what? If you calculate the cost of money over the life of the loan relative to where you can potentially scale the business to over that period, it’s usually a negligible cost.
In addition, in many companies, prices can be adjusted to reduce or eliminate the additional debt service costs.
It would be crazy to buy a declining company – Wrong!
This problem always emerges when the economy is collapsing, or the threat of doing so is on the horizon. Buyers typically panic and flee from companies that may be going through a recession or when the economy is uncertain, but now could be the best time to negotiate incredible deal terms. The recession is usually temporary, so you just need a little persistence or foresight. If you want to be an entrepreneur, you have to get used to a little bit of uncertainty, and you’ll really thrive if you learn to embrace it. Buyers should not leave the market and give up on a long-term plan or dream based on a short-term speed bump.
Banks are slowing down their lending – perfect!
No surprise here – lenders are taking their time, doing more underwriting and becoming more demanding in their financing needs. Nevertheless, it’s financing deals, the landscape has just changed, which is certainly an expected event.
The downside of their timing and additional adoption benefits buyers in several ways:
- They move forward with deals they think can be done;
- Their extra diligence provides a buyer with additional comfort in evaluating the company;
- It is helpful to avoid overcharging buyers;
- If they fail to finance the necessary amounts, a buyer will get the ammunition they need to get the seller to participate in the financing.
Many potential buyers are taking a wait and see approach – Great!
This by-product of an uncertain market is great for serious business buyers. The market is always flooded with potential individual buyers and few will ever close a deal. In fact, less than 10 percent of individuals seeking to acquire a company complete a transaction. When the market is in motion, the number of active ‘viewers’ decreases and there is therefore less competition. This is a great way for the serious business buyer to get to the front of the line.
There is one proven way to take advantage of the market
While there are many reasons for the dismal statistics of failed takeover attempts, they are almost always preventable. As someone who has been in the corporate sales industry for three decades, most of which has been spent representing buyers, all of these failures have one common denominator. It’s a lack of education. Potential business buyers go through the process without a plan in hopes that they will be successful one way or another and it rarely works.
The business buying process is complicated, but not difficult. It can be overwhelming if you don’t have a wealth of experience, but it’s manageable if attacked in a methodical manner. The only way to success is to take it in bite-sized chunks, learn from someone who has successfully done what you’re trying to do, and stick to the proven steps successful buyers follow.