I wrote a post last August regarding trends we are seeing in the business for sale market. The macro-economic factors regarding interest rates, recession threats, job and stock market volatility had not yet taken hold at that point. The trends then, as emphasized by the industry experts I interviewed, were still quite positive. Lenders were busy as were business brokers and consultants, deal flow remained strong, interest rates were not stressful activity, and so overall, things were good.
Generally, the lower market lags the middle/upper markets from macro-economic trends. My position back then was “it’s coming”, and yes indeed it has, however, in these times, exactly as it has been the case in similar historical times in the thirty plus years I have been in the business for sale sector, it may be an incredibly opportunity time to acquire a business.
We are not exactly at the point where there is blood in the streets. What is happening however is there is a significant contraction all around. Lenders are tightening up. Many businesses are experiencing declines which in turn causes lenders to hold off, or for the market itself to reduce business valuations. Higher interest rates scare off many potential buyers (I am not sure why as I will discuss briefly). Confidence for the average consumer is declining and when that happens in significant numbers, the business for sale lowers the market implodes. To reiterate, we are not there yet, but it is coming.
Let us look at some of these situations and how a ready and well-informed business buyer can take advantage of the market.
Banks Are Less Flexible – There’s A Better Place To Find The Money
We are seeing larger deals with significant seller financing to bridge the gap between third party lenders and the equity that buyers are putting into the deal. This has not always been the case in the past. Typically, the larger the deal, the less percentage of seller financing, if any. This is good for both sides. A seller can now contribute to getting the deal to the finish line instead of not closing because the buyer cannot leverage it adequately. For buyers, this is an additional source of financing which gives them more flexibility with deal terms and covenants.
Interest Rates – Forget About Them
Rates of zero or under a few percent are long gone. goodbye. Forget it. They are not heading that low anytime soon. Buyers who fret over rates are focusing their attention on the wrong issues. Yes, the increased rates impact the ROI and leverage, but so what? If you calculate the cost of money over the terms of the loan relative to what you can potentially scale the business to over that time frame, it is usually a negligible cost.
Additionally, in many businesses, prices can be adjusted to reduce or eliminate the additional debt service cost.
It Would Be Crazy To Buy A Declining Business – Wrong!
This issue always comes up when the economy goes down, or the threat to do so is on the horizon. Buyers usually panic and run from businesses that may be experiencing a downturn or when the economy is uncertain, but this can be the single best time to negotiate incredible deal terms. The downturn is usually temporary, so you simply need a bit of staying power, or foresight. If you want to be an entrepreneur, you must get used to a bit of uncertainty, and you will really thrive when you learn to embrace it. Buyers should not be leaving the market and giving 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 requirements. Nevertheless, they are financing deals, the landscape has simply changed, which is certainly an expected occurrence.
The flip side to their timing and additional underwriting is beneficial to buyers in several ways:
- They are moving forward with deals they believe they can get done;
- Their additional diligence provides an added level of comfort to a buyer in evaluating the business;
- It is helpful to prevent buyers from getting over leveraged;
- Failure for them to fund needed amounts to provide a buyer with the ammunition they need to get the seller to participate in the financing.
Many Potential Buyers Are Taking A Wait and See Approach – Fantastic!
This by-product of an uncertain market is terrific for serious business buyers. The market is always flooded with prospective individual buyers, and few will ever complete a deal. In fact, less than ten percent of individuals looking to acquire a business will complete a transaction. When the market is in flux, the number of active ‘lookers’ declines and so there is less competition. This is a wonderful way for serious business buyers to move to the front of the line.
There Is One Proven Way To Take Advantage Of The Market
While there are many reasons for the small statistics of failed attempts to acquire a business, they are almost always preventable. As someone who has been in the business sale sector for three decades, most of which have spent representing buyers, there is one one common denominator to all of these failures. It is a lack of education. Prospective business buyers go about the process without a plan hoping that somehow they will be successful 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 is manageable if attacked in a methodical way. The only path to success is to approach it in bite-size pieces, learn from someone who has successfully done what you are trying to do, and by adhering to the proven steps that successful buyers follow.