• Mon, Sep 28, 2020
  • Deal Terms To Reduce The Risk When Buying A Business Now
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  • Article by Richard Parker, published in Forbes on August 13, 2020. 

    It has been difficult to provide any meaningful updates around the business for sale marketplace since COVID-19 took over the planet. The upcoming election adds another interesting dynamic to the mix. Without being political, it is obvious that the next President will deliver one of two vastly different agendas. In any event, while things have not necessarily settled down, the landscape for buying a business in today’s environment has some more clarity.

    I have spent considerable time speaking with business owners, prospective buyers, lenders, and intermediaries over the past five months to get their opinion on the current conditions and how they see things unfolding. The one common thread to their opinions - nobody has any clue where the market is going.

    Do Not Use The Stock Market As A Barometer For Main Street

    The market plunge in March and subsequent rebound does not reflect what is going on in the “coal mines” of small business. The only relationship is that some prospective buyers may have access to more capital as a result. However, if your plan is to leverage stock market gains to fund your acquisition in part, make sure those gains are still there when you have to write the check for the purchase.

    Of course certain sectors can be an indicator of macro strengths or weaknesses that may trickle down to small enterprises, but that is more of the exception.

    Other Notable Market Trends

    Typically, when the economy sours, there are significant distressed business buying opportunities. The key is to define “distressed” and to not confuse distressed with ones that are on the way to bankruptcy. Thus far, the small enterprises that are feeling the most pain are ones that without significant capital investments will go out of business. If you are considering exploiting this area, you must be able to fund the operations for an undetermined amount of time.

    Overall, since March, small business transactions are down approximately 40%. This data is culled from conversations with industry insiders and data comparisons of year over year sales in certain markets. Certainly, this is not a surprising statistic.

    Multiples have held firm, yet this is not really surprising either. When the market drops and businesses start experiencing systemic declines, those business that can withstand the tumult and perform well are going to be even more attractive to prospective buyers. After all, who does not want to buy a recession-proof business?

    Lenders have evaporated - the SBA is swamped with stimulus lending and acquisition loans are not getting done. Further, their criteria requires updated financials and many companies will not meet their benchmarks due to declines they have experienced in the last six months.

    The Best News Of All

    With the drop in traditional lender financing, business owners who truly want to sell have two choices:

    • Take a major haircut to get a cash buyer
    • Finance the deal themselves

    The latter is exactly what I have been teaching and preaching for 30 years and it is now the only option if a seller wants to get close to their price.

    The second piece of wonderful news is that buyers can and must include earnouts into their deal. Recent declines in a business will scare a buyer. Uncertainty is rampant. How can a buyer be confident the company will return to past levels? Moreover, how can a seller possibly represent what will happen unless they can predict the future? Intermediaries can do all the selling they want, but they are not in any position to make that determination. This is an ideal environment for a buyer. Deals can easily be structured so that sellers will get their price if (and that is a BIG “if”), the business hits certain targets after the new buyer takes over.

    Take Advantage Of The Market

    Yes, there is uncertainty. Sure, there are certain sectors to avoid. No doubt there is added risk now. But, for the true entrepreneur, these are all factors they must overcome. Now may be best time I have seen in the last three decades where a buyer can use the strategy with a seller that I have followed with great success: “I’ll pay your price; you take my terms”...and rest assured the best deals are always in the terms.

    Steve Niehaus, MBA, CBI
    [email protected]