Whether the economy is improving or downswinging, there will always be more media coverage of big companies. In downtime, the conversation turns to layoffs, restructuring, and other Wall Street-type issues. But what happens on Main Street? A recent survey of second quarter business sales by bizbuysell, the largest business database for sales, looks at a range of metrics and explains what’s happening in the market.
After reviewing the data, we asked three well-known industry experts on the buying, selling, and lending side of small business transactions to comment on their experiences related to:
- Significant trends or changes in valuations, multiples, or loan demand
- Effects of rising interest rates and inflation
- Impact of past recessions on small business sales
- Advice to give to buyers or sellers in this market
While the information in the study was interesting, there was nothing overwhelmingly drastic in terms of overall activity that seemed to be underway. “Things seem to be going well, but our industry typically lags behind the macro economy,” said Andy Canetta, chief executive of World Business Advisors. I’m here.
Are small business sales declining?
Small business sales fell 3% in the quarter, but increased year-over-year, according to the report. John Martinka, his adviser to the highly respected buy side and author of Buying A Business That Makes You Rich, Martinka Consulting, said: We have clients looking into manufacturing, testing laboratories, coffee roasters, alarm companies, and business services, and they’re all a little more cautious, more hardworking, but full speed ahead. ’” He also raised an important point about how budding entrepreneurs view the economic landscape.
One area that I have found to be effective in accurately measuring the pulse of a business’s sales situation, especially in low-end Main Street type businesses, is SBA loan activity. Due to the stringent criteria for individuals and businesses to qualify, the number of potential buyers in a loan pool is often a good indicator of what’s really going on on the front lines.
I asked Nimi Natan, division president and CEO of Gulf Coast Small Business Lending, a national preferred SBA lender, if his firm is seeing a decline in loan applications for small business acquisitions. rice field. “We don’t. We’re seeing a decline in the number of transactions in the market, but (a) borrowers are turning to SBA products as traditional lenders tighten, and (b) fixed rate 7a, etc. We’re busier than ever, as innovative products address rising interest rate concerns.”
It’s clear that Cagnetta’s comments about the tendency of small business sales markets to lag behind the economy as a whole may actually be true today. My view when guiding potential buyers is to determine whether the overall activity is important to the individual situation. You should focus on what the short- and long-term future looks like, and then decide whether and how to proceed.
Rising interest rates drive some crazy – true entrepreneurs look the other way
The survey found that 39% of buyers indicated that interest rates are affecting their ability to finance their purchases, and 49% indicated they are delaying purchases due to rate hikes. Nathan of the Gulf Coast makes an interesting point. “Since most of his SBA loans are liquid and pegged to prime, future interest rate increases are a major concern. We have addressed this concern by offering a fixed rate option.”
Natan’s comment is an important option for buyers. Just because interest rates are rising doesn’t mean it’s a deal killer. Be creative. You always have options like:
- fixed at a fixed rate
- If debt service is increasing, have the seller finance the majority of the transaction at a discount rate
- negotiate a price cut to cover additional debt repayments
What’s Happening with Multiples?
The study found that revenue and cash flow multiples declined by 6% and 3%, respectively. It’s a small decrease, but it’s still decreasing. Since this study is truly focused on small businesses, the impact of the dollar should also be kept in mind. The median selling price for the 2,342 companies in the study was $315,000 for the quarter.
In recent years, multiples have increased at a breakneck pace in some sectors, especially in the midmarket and above. The low-end market has increased as well, and the market will do well to undo these numbers and represent acceptable ROI levels for individual buyers. Quarterly multiples were 2.9x compared to 3.0x, with no significant impact. John Martinka agrees with what others have seen, stating:
My view is more consistent with “it will come”. Multiples have risen too quickly, creating unrealistic expectations among sellers. Multiples must make financial sense for the market to function efficiently. This is especially true for medium-sized and large enterprises. The increase in multiples as a result of tight deal flow has resulted in a significant number of bad investments, especially in the private equity world. The trickle-down effect on Main Street is the realization that sellers are worth similar multiples as they read about multi-billion dollar deals. Ultimately, it doesn’t work at the upper end, and it doesn’t work at his $300,000 business turnover identified in the study.
“Valuations are declining as the M&A cycle enters a trough. A combination of factors such as uncertain cash flows from both recession and inflation. Declining credit availability. Reality between sellers and brokers. According to Nimi Nathan, the “best” deals are being pulled out of the market because sellers prefer to wait for cycles.
learning from past recessions
Cautious buyers and sellers, whether we are in or headed for a recession, whether or not we agree with how the confidence of political minds has constituted today’s economy , we can look at similar historical events to get a basis for what happens.
We often hear “this time it’s different” and it might be right. In my experience, a technical economist’s definition of a recession doesn’t matter until its consequences start to affect small business owners and prospective buyers. With labor and supply shortages in his chain, rising interest rates, high-profile wars, and certainly inflation, the current situation can be viewed as a complete storm. A lot is happening. Nevertheless, as I wrote in my previous post, I don’t think the impact will be particularly dramatic as there is a lot of capital available and it needs to be deployed.
“So far, the market reaction has been more muted than before, suggesting (a) we might not be in a recession, and (b) if so, employment is stronger than ever. I emphasize that it’s strange because the M&A cycle and the economic cycle are correlated, but not the same.”
Lenders may get stricter, but they won’t stop lending. Institutional investors like private he equity firms have to either buy the business or return the funds to a limited partner, but that doesn’t happen. Entrepreneurs are always motivated to acquire companies and consider negotiation strategies, valuations and deal terms to mitigate risk.
Andy Cagnetta says: During the Great Recession, corporate values fell in half. The main reason was that profits were also declining and the banking system’s borrowing capacity was non-existent. Banks are now healthy, SBA loans are available, and most business profits are stable or growing. ”
What Buyers Should Do
John Martinka has an interesting perspective when he suggests to buyers: By the time we find, analyze and build deals, the recession is likely to be over as it is projected to be short and mild. ”
John isn’t saying buyers shouldn’t be diligent. Rather, it is an idea that is not only compelling, but has practical implications. After more than 30 years of his time in the M&A field, I know that individuals waiting for the right time to buy a business seldom, if ever, acquire it.
And what about owners looking to sell?
According to a BizBuySell report, 40% of owners believe they would have received a higher price had they sold last year. At this point, his Natan of the Gulf Coast presents options to consider. “We are also fortunate to have a strong presence in some of the fastest growing markets in the country that have not slowed down. Sophisticated sellers have decided to hold off selling until multiples and buyers return to 2019 levels.”
The report goes on to say that 38% of owners cite lower revenues as a reason they think they could have sold more last year. This data point is important and can be an exciting opportunity for owners. Anything that has a solid, stable business, good financial record, is attractive to a wide range of buyers, and transitions well to new owners. Especially when there is constant demand and only a few businesses are on the market. they sell Valuations may adjust and trading terms may fluctuate, but ultimately you want good companies at the right price regardless of macroeconomics. In addition, if the business performs well even during a recession, it could make the company even more attractive to acquirers.
Martinka suggests: Vice vers if your business is struggling or struggling. Expect a little more due diligence by buyers and banks. There is a lot of money there. ”
Predicting the future of the economy is not for everyone. If I knew for sure what the sales of my Main Street business would be, I would start buying lottery tickets. No one knows how long it will last.
Based on the experienced and up-to-date comments of John Martinka, Nimi Natan, and Andy Cagnetta, the market remains very active, trading is taking place and capital is available.
Buyers and sellers need to cut the noise down a bit and keep moving forward. Creatively structuring deals and matching valuations is a way of dealing with the market from both sides of the table. Buyers need to stay comfortable with the risk factor and sellers need to get down to business value.
Sure, the economy is probably a reason to delay decision-making on either side, but will it come to a complete halt?