Is Now The Right Time to Buy a Business?
Wow! Did last week’s post ever open up a box of worms!
That post addressed a question we get all the time. “Is now a good time to sell my business?” (And for those of you who haven’t read it yet, it explains why that is the wrong question to be asking.)
But that post incited a flood of one other question – and one that is the complete opposite: “Is now the right time to buy a business?”
The pandemic has upended most businesses – including ours; at least insofar as the advice we give to clients.
But the question is legitimate: Is now a good time to buy a business?
The effect of the pandemic on business is general has been bad. Certain industries – particularly travel and leisure related businesses such as hotels and restaurants – are getting creamed. I’ve seen estimates that some 20% of all restaurants in business prior to the pandemic will never reopen.
But the world will keep turning and people are going to keep buying things. And people still want to travel and eat out – and when a vaccine is developed, they will.
We believe that opportunities currently abound for those brave enough to wade into the deep end of the pool.
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First, there’s plenty of money out there and it’s cheap as heck.
Governments seem to be shoveling the stuff out the cargo doors of fleets of hovering helicopters into the arms of anyone with a heartbeat! Interest rates are at historic lows. It has seldom been easier to get the capital to buy a business.
Second, we’re in the early stages of the Silver Tsunami – the “Baby Boomer Business Selloff“. More people are deciding to sell and head into retirement. Many of these sellers are quite motivated – and want to help buyers buy!
Based on all that, it would seem to be an excellent time to buy a business. But, of course, there are always a few caveats to be aware of and actions to take that will help mitigate risk. Let’s look first at a couple of caveats.
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Buy a Business With Caution
Much of the money that governments have been shoveling out the door has been in some form or another of so-called “forgivable” loans. Though the money these programs have been doling out is flowing fast and furious, they are light on the details that would warrant forgiveness.
As of July, in the United States, the government’s Small Business Administration (“SBA”) has awarded such funds to more than 650,000 small businesses through its Payroll Protection Program (“PPP”). This means that a certain amount of business acquisitions in the near future will involve companies that have received such loans.
That fact suggests that, to buy a business at some point over the next year or so, might mean that the loan forgiveness details are not clear enough for the parties to know what debt is forgiven and what might need to be repaid.
Though as professional business brokers we’d like to help answer buyers’ questions, we’re neither attorneys nor SBA specialists. If you find an enticing opportunity over the next 12 months, determining whether or not the business received any PPP or other stimulus money is critical to understanding that business’ financial condition.
I also suggest having an experienced transaction attorney review all the paperwork to ensure that any liability for any such funding that might extend past closing is identified and subsequently addressed in the final documents.
Another issue to consider is the impact on the business of the pandemic-induced, government-ordered shutdowns.
When doing due diligence, you’ve got to ask the right questions. A buyer’s objective is to determine what long-term impact – if any- the shut downs will have on the business and how long it will take the business to regain its pre-pandemic vigor. The ability to do this is more art than science but whatever conclusions a buyer comes to will impact what the buyer feels can be paid for the business.
As I mentioned earlier, opportunities are everywhere but culling through the pile to get to the best ones will take work.
If you’re a buyer or a business broker representing a buyer, I would suggest the following considerations:
- Be prepared to kiss a lot of frogs. You may have to look at 10, 20, 30 or more opportunities to find the right one. Buying a business is, like selling one, a time-consuming task.
- Be an information vacuum. It’s critical to get as much information as you can about any business you’re thinking about buying. You can’t have too much of it. For starters, you will need at least three – and preferably five – years of profit and loss statements and balance sheets as well as asset inventories and copies of all contracts the business is party to. You want to learn as much about the business as possible in writing.
- Consider owner financing. Cash is cheap, but owner financing, whether it is whole or partial, is always good to have. By owing the seller some money, the buyer has, by default, a partner who is vested in the buyer’s success and will be there to answer any questions.
- Do your due diligence. And then do it again. Remember, nobody knows more about the business that is being sold than the person who has owned it for years.
- Consider getting a valuation. Most people think that a business valuation is done for the owner of the business rather than the buyer. While this is generally true, getting a qualified business broker to value the business for the buyer makes at least a much sense. Even if the seller shares their valuation with the buyer, the buyer doesn’t know the qualifications of the valuation’s author. This is a couple of thousand bucks very well spent.
The Bottom Line
There are several strong arguments that this is an excellent time to buy a business. Every situation has its caveats and this one is no different.
But with enough due diligence and the right team working for the buyer, if would seem that there are a lot of positives lining up right now.
If you have any questions, comments or feedback on this topic – or any topic related to business – I want to hear from you. Put them in the Comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week!