As we move into the last quarter of 2022, few would argue that market uncertainty has substantially increased to a level that have caused many in the process of buying or selling a business to push away from the closing table and take a “wait and see” approach. Our firm works with businesses across many different types of industries and while each industry has its unique set of challenges, there have been three clear messages from the current market that should not be ignored.
Higher Interest Rates Are Affecting Buyers
The average interest rate for SBA and other traditional loans have nearly doubled compared to the last year. Even though many businesses are still showing strong financials, buyers of businesses under $1M in purchase price have been affected the most. The amount of buyer equity required to purchase a business has also increased by many lenders. A recent panel of bankers were asked how long these interest rates will last and the consensus was that the rates would likely lower in the next 6-12 months. This sentiment has caused many buyers to hold off on purchasing a business this year and pushing the closing well into next year.
Key Employees Looking for More Stability
Small businesses are and will remain the life blood of our economy but inherently are still high risk. In uncertain economic times, many employees start to look for what they believe are more stable positions and this has been more pronounced with our challenging labor market. Unfortunately, when this happens to a company in the process of selling, the impact can be disastrous. In some cases, these key employees may also be aware of the company actively looking for new ownership which can further exacerbate the employees’ perception of uncertainty. In our experience, revealing to key employees that the owners are actively looking to sell is very risky and often backfires. The owners’ tolerance for uncertainty and risk is rarely shared so keeping the sale of the business confidential throughout the sales process helps mitigate this risk.
Business-to-Consumer (B2C) Businesses Are Hard to Sell
The coupling effect of higher interest rates, inflation, and ongoing debates on a looming recession has caused many buyers to no longer pursue B2C companies. While many restaurants, retail, or even e-commerce companies continue to have solid revenue and profitability trends, buyers are just not convinced that these trends will continue over the next 6-12 months. Unfortunately, owners in these companies are either being forced to take a low-ball offer if they really need to sell or forced to wait until these negative perceptions change. Conversely, for Business-to-Business (B2B) companies with the same healthy revenue and profitability trends, buyers are still cautiously moving forward with the perception that these companies may not be as directly affected by interest rates and inflation.
Uncertain market conditions will always exist which is why it’s important to know the different risks and work with a team of experienced advisors to help mitigate these risks in the sale of a business. The majority of our business comes from referrals, and we appreciate your continued trust in our firm.
Robert W. Amerine
President, CBI, M&AMI