Tuesday, October 3, 2023
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The Changing Economy's Effect on the Decision to Buy a Business

by Dave Driscoll

You can’t escape the headlines, news feeds and print media. All the news outlets are chanting about the same topics: Inflation! Interest rates!

Yes, the changing economy is news. The numerous opinions about what is next are all based on someone’s point of view. Recall that businesses were healthy prior to the pandemic. If a worker wanted a job, there was one available. Interest rates and inflation were low. Then the pandemic shut down the world economy.
The U.S. government stepped in with much needed assistance for businesses and citizens with forgivable loans and direct grants to individuals and families.

The Federal Reserve’s balance sheet, the entity that prints the money, grew from $1.5 trillion in 2008 to $8.9 trillion today. So, $7.4 trillion has been pumped into the economy over the past 14 years. That’s a lot of money sloshing around in the economy. Logically at some point, the excess that is unneeded in the economy (inflation) will need to be taken out. How does that happen? One of many methods is the Fed’s use of the interest rate as one of its financial levers on the economy through the banking system.

The mergers and acquisitions (M&A) and small-business brokerage industries have been very active over the past several years. There are many reasons and motivations that explain why business transitions have been so robust, including the Great Resignation, aging Boomers, the search for independence and freedom of choice, and the desire to be in control rather than to be controlled. Business transfers started to gain momentum in 2015, escalated through the pandemic, and continue through today.

The reason for this sustained business M&A activity is largely generational. Since 2009, many owners have decided to sell their business and begin the next chapter in their lives. Navigating many obstacles has slowed down the process, but not the enthusiasm to sell. The financial calamity of 2008-2009 and the search for direction following that financial collapse were major glitches, as was the pandemic.

When uncertainty began to clear from the 2008-2009 collapse of the financial markets, the desire to sell could no longer be contained. Many sellers had to exit because of age, burn out, health issues, or family concerns.

Buyers had access to capital to acquire healthy businesses. Companies with solid business models and sustainable cash flows sold. Interest rates throughout that period were very accommodative. Good businesses sold. Not-so-good businesses did not. The fundamentals that support M&A activity had not changed. Good businesses sell regardless of other circumstances.

Now we are experiencing the process of removing excess money that is unneeded by the economy to grow at a reasonable rate. Remember, the Federal Reserve interest rate in 2008 was 5.25% just prior to the collapse of the financial markets. In 2009, the rate dropped to 0%. The June 2020 announcement from the Federal Reserve pegs the rate at 1.75%.

Look at the movement and change in those numbers from 2009 to 2022. Logic would indicate that interest rates are still too low, and we will be seeing additional increases. Ask yourself: Is that actually bad? Where should interest rates be logically?

The relationship of the Federal Reserve to the economy has been likened to a spiked punch bowl at a party. The punch is great at the start. Leave it unattended too long, and the party can get out of hand. Well, the Federal Reserve left the punch out for too long. It’s time to sober up.

The point of this article is that the economy and interest rates are episodic and cyclical, but in the long run, the trend line is generally slanted to increase. Don’t be paralyzed by the scary headlines, media outlets and those who benefit from financial panic to sell their services. Focus on long-term cycles and make decisions accordingly. Remember, everyone is an expert… just ask them. Disregard the noise and bluster and think for yourself.

The fact remains, good businesses sell, bad businesses don’t. Don’t make long-term decisions based on short-term thinking or fear. Loans can be refinanced. If you pass up buying a strong business waiting for the perfect conditions, you’ll miss the opportunity, and the business likely will be off the market for nearly a generation.

Dave Driscoll is president of Metro Business Advisors, a business brokerage, valuation and exit planning firm helping owners of companies with revenue up to $20 million sell their most valuable asset. Reach Dave at DDriscoll@MetroBusinessAdvisors.com or 314-303-5600. For more information, visit www.MetroBusinessAdvisors.com.

Submitted 1 years 97 days ago
Categories: categoryValue Proposition
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