Business Acquisition in a Down Market
Our firm continues to have daily conversations with both sellers and buyers on how the latest market conditions impact transactions of privately held businesses. Many owners are questioning whether it is a good time to sell as some watch their retirement accounts take a turn for the worse with high inflation hitting hard as well.
If you can get past the initial knee jerk reactions, now is a still great time to sell due to these three long standing principles.
1) Cash (flow) is still king
Especially in a bear market, many buyers tend to return to the basics of cash flow and return on investment. If a business model is more elastic and the company can easily pass on increasing supply, labor, and/or fuel costs, then buyers see these types of businesses as lower risk compared to others whose gross margins have dropped substantially this past year. In general, A lower risk business equates to a higher multiple on cash flow resulting in a greater purchase price.
2) Financing is still relatively inexpensive
By improperly assuming selling a business is like selling a house, many believe that the increased interest rates will defray buyers’ ability to obtain financing. The reality is that well-qualified buyers can continue to successfully finance business transactions even as interest rates increase. For example, for a $5M purchase price that is being financed with 20% down over a 10-year period, a 1% rate hike only increases the monthly payment by around $200 or $2400 per year. Most businesses this size will have a minimum of $1M+ in cash flow so the impact due to increasing interest rates to the buyer is minimal.
3) “Buy Low Sell High” is still the goal
Whether it’s the stock market or privately held businesses, buyers understand it’s a good time to buy-in during substantial market corrections, which is why buyers are now even more motivated than a few years ago. The real struggle has increased for sellers to retain their value and not accept perception that a down market always equates to a lower valuation. For this reason, it is important for owners interested in selling soon to continue to drive revenue, protect gross margins, and place as much as possible to the bottom-line of their income statement.
Get Help with Your Sale
Our firm provides the proven strategies and expertise throughout the sales process to help avoid the pitfalls in a down-market and maximize the results at the closing table. Please contact us if you or someone you know is interested in having a confidential conversation with one of our team members. The majority of our business comes from referrals and we appreciate your continued trust in our firm.
Robert W. Amerine
President, Certified Business Intermediary (CBI)
Merger & Acquisition Master Intermediary (M&AMI)