MBB From Brian

Buying or Selling a Business at “Peak Market”.

September 03, 2018

The cyclical nature of the economy can add uncertainty to the timing of an acquisition, or an exit from a business. However, unlike the clarity of an improving economy or the risks inherent in a downturn, buying or selling at a market high creates a unique set of challenges. While we can only see a market peak in hindsight, let’s consider the current economy: 9 years of uninterrupted growth, low interest rates, low unemployment, stock market high and historically low taxes. Meanwhile we’ve seen a flattening of market increases and a levelling off in real estate values. So, while it’s a great time to sell a business and strong economy to buy and own a business, it’s understood that at some point we’ll encounter a downturn or correction. The combination of favorable economic conditions combined with a near term uncertainty can complicate a business sale.

A couple of related issues to consider:

Pricing. While every business owner wants to maximize the sale price of their business, buyers don’t want to pay top dollar knowing that a market correction or downturn is expected in the near term. Sellers may need to agree to some type of incentive-based financing as part of the deal structure for the buyer to move ahead.
Financing. Many banks are lending aggressively and looking for deal flow. However, the bank that lends for an acquisition may not be the best bank if the economy turns. Will the bank explore restructuring of debt, interest only payments or maintaining a critical line of credit in a downturn?
Seller Financing. An unknown short or midterm horizon may make sellers less inclined to provide seller financing in general. They’ll want as much of the sales price in “cash at close”. This could make it more difficult for a buyer to put together a total financing package.
Exposure. Does the product or service make the business more or less sensitive to an economic downturn? How quickly will the effects of a recession impact the business operations? Will these factors make the business less attractive to sell or banks less inclined to lend for an acquisition?
Debt & Leverage. Selling at peak market can be great for a seller. But available lending and low interest rates can allow buyers to borrow heavily for an acquisition. A leveraged business can be handicapped if the economy turns sour. It’s frustrating to see a business fail only because they are overburdened with debt.

While there are compelling reasons to buy or sell a business in a strong economy, the uncertainty of a market correction can complicate a deal structure. Both buyer and seller may need to make concessions during the negotiation, or find creative ways to share the risk.

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