What is the investor to do now? With record amounts of cash on the sidelines, debt yields at history lows and gold hitting new highs, many potential investors/business buyers are questioning where the economy will be heading from here and what is the best time to acquire a business.
Whereas we would never claim to have that crystal ball, we can however, contribute a few recent observations out of our trade.
In terms of the economy’s direction, several factors point either way: on the “good side”, durable goods orders are way up for goods such as appliances, existing home sales were up by 7%, the stock market is way up, and cash for investments is plentiful available. On the “bad side” however, consumers are continuing to reduce their record debt levels, thus, inducing somewhat weak spending, surveys point to weakening business profit margins, and stocks are certainly no longer cheap. With no clear trend in sight, our firm believe is that the economy will eventually experience a slow recovery.
More importantly, though, is the question of personal life change and timing for a potential business buyer. The management of many mid sized businesses can certainly not exclude themselves from general macro economic trends, but the individual management talent and motivation more often overrules such broad based trends. Some of our (sell side) clients have convincingly demonstrated how to significantly outperform their peers in this environment, not only in terms of gaining market share but also in their financial performance. Significant adaptation in business methods to these challenging times have made them better companies.
Thus, the real question for the business buyer then becomes, does she/he see opportunity in a particular market and does she/he have the motivation, time and talent to turn/expand this opportunity into a successful investment by way of purchasing a business.
Taking that point of view, timing becomes somewhat of a secondary issue. As we had reiterated a few months back, many businesses generate good cash flow for the seller even during “bad” times, thus, the need to immediately sell taking a second rank. Yes, there are businesses with poor cash flow wanting to sell immediately which could represent an opportunity for a buyer, but if the low cash flow is a structural based issue will the cash flow improve then during an economic upswing, or is it merely a matter of the weak being sorted out during a down turn? Consequently, many “opportunities” during poor economic times are not really opportunities but merely represent a rude awakening during a better economic environment.
We have consistently worked with sellers who have proven that they can weather a storm and have been in business for many years and thus, can only encourage any investor – or business seller for that matter – to give us the opportunity to discuss their plans in detail with us. We have the experts on staff to provide a comprehensive review of your plans.