The Hidden Wall Street Impact on Main Street Transactions

By Achim Neumann

Frequently, we see business owners attempting to “time” the sale of their businesses, motivated by factors like personal lifestyle, tax considerations, business seasonality, or a desire to finish a project  before selling.

“Over and over, we have cautioned business owners not to ‘time’ a transaction,” says Achim Neumann, President, A Neumann & Associates, a New Jersey-based Merger & Acquisition/brokerage firm. “Once a deal has been agreed upon, it should be the goal of both parties to close the transaction as soon as possible.”

What can go wrong, and how can Wall Street’s gyrations have an out-sized impact on a mid-sized transaction?

For one thing, in small to mid-sized transactions, the investor typically relies on personal funds for at least 25% to 40% of the agreed-upon transaction amount.  Quite often, these funds reside in stock and bond portfolios.  “At the time an offer has been accepted,” says Frank Arcoleo, Managing Director, Central Pennsylvania, “the investor starts liquidating positions to raise cash.  If the market experiences a significant downturn between the time of offer acceptance and deal closing, this might be problematic.”

A second factor is that such investor portfolios often also serve as collateral for acquisition loans, and declining portfolio values obviously shrink such collateral.  “Add in the emotional impact of situations like we experienced in 2009 and 2010,“ says Gary Herviou, Vice President, “during which investors saw tremendous portfolio devaluations, and there could be considerable hesitation to execute acquisitions.”

Additionally, there can be a change in the financing environment.  In general, deal structures call for fifty percent bank financing.  Delaying a deal closing can have significant negative impact in a variety of ways.

First, a change in the macroeconomic environment can reduce the willingness of banks to lend.  As recently as two weeks ago, a Bloomberg Radio interview discussed the banks’ willingness to lend, and the interviewee expressed that in the current environment, it is more profitable for the bank’s shareholders for the bank to allocate excess cash to buying back its shares in the stock market than to provide new lending.  No wonder that even individuals with stellar credit ratings, like former Federal Reserve chairman Ben Bernanke, have been denied refinancing of their Washington, D.C., homes.  “In other words, delaying a deal can simply close the door on funding availability,“ says Aaron Soury, Managing Director, New York.

Secondly, the lending interest rate can change when a deal is delayed. For example, assuming a $2m transaction with fifty percent bank lending on a company with a $400k cash flow, a two percent change in the interest rate of the acquisition loan will reduce the free cash flow by 4%.  How many business owners are willing to forgo a 4% reduction in profit margin?

In sum, once a deal has been agreed upon by seller and buyer, both parties should move expeditiously to close the transaction.  “Time is the enemy of all deals” is a common statement in the brokerage industry.  And Wall Street might have considerably more impact on a deal on Main Street than the mid-sized business owner can imagine.

===

About A Neumann & Associates, LLC

Neumann & Associates, LLC is a professional Mergers & Acquisitions and business brokerage firm with more 30 years of experience in PA, NJ, NY, MD and DE that assists business owners and business buyers with the business transfer process in a completely confidential manner. A Neumann and Associates is affiliated with the BBN, with over 50 offices and access to a national network of qualified buyers and sellers. For more information, please contact A. Neumann & Associates at 732-872-6777.