Business Brokerage Can Survive During The Recession
Depression… recession… economic turmoil… market collapse and other foreboding terms dominate the news and adversely affect our activity as business brokers when dealing with sellers, buyers and financers. Sellers suffer from declining demand for goods and services that expose them to a toxic combination of deflated revenues, squeezed margins and shrinking and offensive business valuations. Growing uncertainty and increased risk perception keeps belt-tightening buyers away from business acquisition, and a tighter credit environment will most likely foil any potential deal anyway.
A good understanding of this cyclical economic reality and its significance to buyers and sellers can help alert business brokers adjust and survive the storm, with some surprising, winning results.
From the selling point of view:
Reduced Competition – Recession acts like a Darwinian “natural selection” process of survival of the fittest. Competing businesses may fail and their customers will move to the surviving competitors, thereby improving the selling potential for the surviving businesses.
Consolidation – Competitors might decide to sell the business rather than fail and shut down. This presents great opportunities for merger work on excellent terms. A sharp business broker can package a number of individual underperforming companies that offer great value through synergy and rationalization of resources.
Good businesses sell better during recession – Non-performing and unprofitable companies dominate the Business-For-Sale market resulting in an oversupply of money- losing companies while the supply of good and profitable businesses decreases. Therefore, the better companies stand out and can command good prices in recessionary times.
Businesses do sell during recession! – Some business sellers tend to believe that the slower economy scares buyers. False! As weakened financial buyers sit on the sidelines, stronger prospective buyers of businesses recognize the reduced background noise in the marketplace, the diminishing competition for good businesses, and the opportunity for lower pricing multiples. Strategic buyers, consolidators, international buyers and institutional buyer are some of the active players for the foreseeable future.
From the buying point of view: THESE ARE REALLY INTERESTING TIMES! – Timing is very important when buying a business. Recessionary periods bring about high levels of uncertainty and doubts among sellers. The overriding motivator will be fear, not confidence thus creating a wide-open field for buyers.
Reduced Competition – While some may argue that layoffs and corporate downsizing result in a sharp increase in qualified buyers, these people are far from being risk takers or possess an entrepreneurial spirit. Real buyer are always a scarcity and even more so in the current economy. Fewer real buyers coupled with a greater degree of caution expect a fast payback of their investment in an effort to minimize risk. Fast payback equates low price/earning multiples and good businesses can be acquired at bargain prices.
It can only get better from here – A critical indicator for a business’ strength is its ability to perform during recessionary times. Therefore buying a business capable of positive performance at this phase of the economy is a great indicator for its viability and upward potential.
Sellers are Motivated – Business buyers are enthusiastic about purchasing a business in good economic times than in bad times. However, It is reasonable to believe that multiples and interest levels are generally lower during economic downturns.
A Fresh Start – Recessionary downward pressure that affects businesses also distresses suppliers, vendors and employees. Buyers can renegotiate a post-purchase, restructure the organization and introduce a new, and more frugal start to improve margins and the buyer’s ability to service debt.
Financing the deal:
The credit crunch that started early in 2008 greatly affected our ability as business brokers to move deals beyond the financial contingency. It also affected the size and volume of deals and the financial institutions’ attitude towards underwriting. Recent changes in SBA guidelines placed new restrictions on the use of home equity for down payment, a move that further complicated the business acquisition process. Difficult times call for different approaches to acquisition financing:
BORSA – Buyers may have all the funding they need right in their 401(k) or other retirement plan. A potential buyer can roll his retirement plan over into a BORSA (Business Owner’s Retirement Savings Account) and then use those funds to fund his/her small business down payment, satisfying the SBA’s requirement.
Seller’s Financing and Earn Outs – This is utterly essential in today’s market! With limited or non-existent financing options, the seller must carry some of the financing to secure and validate a deal. Earn outs, where the seller receives less upfront, and gets additional money based on the business’s performance is another popular option that help validate and secure a deal.
Pledge Secured Loans – This is a very useful line of credit for buyers who do not want to liquidate their stocks. Through pledging their savings or stock holdings, buyers can borrow the money needed at a very low interest rate. A good investment portfolio may generate returns in excess of the interest paid on the line of credit, and the buyer effectively enjoys a negative interest rate.
Many of today’s business brokers have never experienced a recession, and they may get caught up in the negativity created by the media and feel helpless. The world is not coming to an end the economy as a whole has just stopped growing for a transitory period. In a recession, as in any time of change there are select opportunities, and understanding the dynamics and changing motivations of buyers and sellers, and the available financing avenues can help consummate business brokers take advantage of weaker competitors, develop new and varied sources of business, and create the opportunities for success to survive and perhaps even thrive in their practice.