Tuesday, April 21, 2020

There are Still Buying Opportunities Amid the Pandemic

It might seem counterintuitive to think about buying a company while America is largely shut down, but that’s exactly what you should consider.

With most businesses around the globe are in some form of a holding pattern, it’s wreaking havoc on the bottom lines of companies everywhere. Unlike normal economic down-turns, even recession-resistant businesses are being forced by the government to lock their doors and turn customers away. As a result, thousands of fundamentally-sound businesses that don’t have the cash reserves to weather the short term storm are finding themselves in big trouble. Even if the businesses have managed debt well and have cash on hand, the uncertainty is unsettling and putting the value of their businesses in question. 

The two main reasons businesses are listed for sale are the age (retirement) or the health of the owner and neither of these motivations wait for government-mandated shut-downs to expire. Consequently, thousands of businesses in America are continuing to be listed for sale, pandemic or not.

That’s good news for buyers. 

“Deals are out there to be had,” explains Alan Austin, President of Mount Vista Capital. “During this pandemic crisis, we are seeing some buyers drop out of the market to focus on their own businesses. Fixing gaps in the supply chain, handling employee layoffs, and managing cash flow.  For these companies, acquisitions are on hold,” he says. But for the buyers that are left, it means less competition to bid against.  

For those buyers bullish on the future and willing to look past temporary market conditions, there are still great opportunities out there. 

Uncertainty: Advantage buyer

Austin describes the relationship between uncertainty and sales price. In business terms, risk (or uncertainty) has an inverse relationship to how much a company is worth. The more the uncertainty, the higher the risk, the lower the sales price offered. In volatile times, there is less confidence in future earnings, so the likelihood of negotiating a great deal for the buyer is significantly improved. He who has less fear wins. 

We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.- Warren Buffett

Low Cost of Capital
Interest rates have been at record lows and have gone even lower recently.  Banks continue to have capital to lend and are still looking for good loan opportunities.  There is evidence that lenders have tightened their underwriting standards, in light of the economic uncertainty, but they are still making loans.  For strong buyers, there is plenty of capital available and the cost of capital to fund acquisitions is at record low levels.

Government help
In addition to the cheap capital, the government has implemented new programs to help small businesses and stimulate the economy. The Small Business Administration (and supporting banks) have had long-standing loan products that help entrepreneurs buy businesses. However, in March, they announced their best terms in history by paying the principal, interest, and fees on new loans for 6 months if issued before September 27, 2020.

For companies eager to further their geographical footprint, or expand their product line, Austin says it all comes down to how comfortable you are in the unknown. We’re going to see some significant “wins” in the next few months. Those willing to make bold moves may make some of the best acquisitions of their career.

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