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Is this a Bad Time to Start or Buy a Business?
The next logical question might be, if things are bad in the economy, is this a bad time to buy or start a business? The answer is decidedly, no! This can be a great time.
But your buying decisions are much different; the pricing and terms are strategically different than they were in 2007. And the type of business you enter into is different. Buying a company that manufactures or sells extremely high end luxury products that are culturally less valued by the current generation, is decidedly not a good idea.
But even then, if the price and terms are right, if the cost of entry is right, and depending upon the anticipated Operating Expenses, in combination with the Revenue you believe you can generate in penetrating a niche market, who are we (as Brokers) to say? We can and do play “devil’s advocate” by throwing in some of these issues in the decision-making process. (At least, we do; it is uncertain what other Brokers may do.) But you may have a different perspective; you may know something we do not, which one of the very valid reasons why we cannot specifically tell you what kind of business to operate, as we stated in a previous post.
Our view is that any crisis can create opportunity. But the specific opportunity has to be relevant and tempered by what is going on: What is the nature of the crisis? What caused it? Are we at the beginning, middle or the end of the period in which that crisis is anticipated to exist? What is the anticipated recovery period, what will cause that to occur and how will that affect your business?
For example, the Temporary Staffing business has long held that it does much better when the economy is at either extreme of an economic cycle. When the economy is in the cellar, Manufacturers (for the purpose of our example,) have already laid off a large amount of their staff, and with then need workers to meet intermittent orders that may come in. They do not want to hire employees, because for intermittent orders, they would just have to lay them off once again, after that intermittent order is completed. So, they go to Temporary Staffing companies and order those people on an “as needed” basis.
When the economy is at its zenith, but it is looking like it is on a “bubble” and ready to sharply decline, (as it did in 2008,) Manufacturers that can foresee that kind of decline will take on additional workers through Temporary Staffing companies, again so that they will not face having to lay off any more workers than is necessary, given the impending downturn I the market.
It can then be said that Temporary Staffing presents such an opportunity that is maximized, even in the face of a crisis – perhaps even more so, in such circumstances. Personnel Outplacement companies are another example: They make their money working with Employees that are being laid off.
As the recovery picks up steam, any “Headhunters” or “Personnel Placement Agencies” become more active and profitable. Employers obviously want to hire the best people; but advertising now is chaotic, to say the least. So many people are out of work that Employers are inundated with applications and resumes, for every position opening they have. And the Internet has made it even worse, because instead of placing an ad in the local paper, the online classified services make it possible for them to get thousands of applications from desperate people, all across the Country. And the vast majority are completely unqualified for the openings being posted. The Placement Agency can filter all of those types of people and ideally supply only the best, most qualified candidates for the jobs, at hand.
In order to determine whether a given business meets the need of the stage of the current economic cycle, the real research begins. But let us defer that to another post and determine that we have such a business, and for the sake of this example, suggest that buying a mature business operation is better than starting one. Is this a good time?
Absolutely! But not all businesses and not all Sellers will fit that generalized answer.
In 2006 and 2007, we spoke to a number of Business Owners about the potential of selling their businesses. They said the time was not right…they were making too much money…they wanted to wait. In some cases, we specifically told them that we thought the economic bubble was due to bust on their industry, and selling now might be the best situation for them.
Now, some of these same people are coming to us, saying they want to sell, because business is not too good, and they are tired. They feel their efforts in maintaining their businesses are not being rewarded: They are working harder for less and less profit.
Unfortunately, no one wants to pay for a losing business. Oh, there are people that do “work out” or “turn-around” acquisitions. But the Business Owner needs to recognize that these people want to pay little or nothing for the purchase. They are examples of people trying to maximize opportunities in a crisis, as well.
Regardless of how the business is valued or the Price is estimated, Profit (sometimes called Cash Flow by some people, SDC or Seller’s Discretionary Cash by Brokers, EBITDA and probably a variety of other labels,) is a huge portion of the consideration for setting such Pricing. Not only does SDC – because we are Business Brokers, so that is the label we employ – reflect the history of the business’ operations with the anticipation of projecting future earnings, but it is a direct measure of Goodwill. It suggests the success of Marketing and Promotion, as well as the repetition of business from past Customers, and provides for positive feedback that would seem to indicate the potential for receiving business by referral from those past Customers and Clients. (It is NOT a guarantee of future earnings!!!)
Timing has everything to do with this, especially in a down market, for several reasons. First, because when there is a drop in Revenue/SDC during a notoriously poor economy, it is very easy to blame the economy. But how is it that you – the Buyer – can be certain of that? How can you determine that, yes the economy caused a downturn, but the Owner made things worse by mismanaging the business that still exists? And if that is the case, your job of turning the company around can be far more difficult, if not impossible.
For example, there is one Company with which we are familiar that had a sudden drop in its Revenue that was obviously caused by the Credit crunch in 2008. But that Company made a fatal mistake of laying off or allowing a major portion of its Sales Force to leave on its own. Though the Company saved a lot of money by reducing the Sales Staff, that left it with no one that was attuned to the market and able to take advantage of any upswings in potential sales. The Company’s competitors maintained their Sales Force, laying off Inside Personnel instead. The competitor saved less money in such a strategy, because the outside Sales Force was more expensive to maintain than the Inside Staff; but its Sales Force continued to hit the pavement and generate what sales it could, then were asked to come inside and perform order fulfillment activities for the sales they elicited, themselves.
As a result, that original Company is now a shell of its former self, losing money every day. It has no prospects for the Company to be sold, because its ability to turn itself around and get back to profitability will literally take years. This is primarily because its competitors have seized the vast majority of the market that still remains, leaving the original Company to look weak, out of touch (which it is, because there is no Sales Force with which to communicate to the market,) and incapable of performing the services its Clients require. The major competitor is also enjoying record profits by taking advantage its own increase in market share, and by learning from the new order compliance techniques it felt forced to employ, which leave it a much leaner organization.
We are acting as a Buyer’s Representative in a negotiation for a Company that did $8 million in sales in 2008, $6 million in 2009 and slightly less in 2010. The Owners want to be paid on the basis of the Revenues and Profits generated in 2008, because the Company is “poised” for a comeback and has the “potential” for getting back to that $8 million mark. There are some very specific reasons why this might work to some degree – probably a competitor that is willing to pay a huge premium to acquire that Company for strategic reasons and has the cash to do it. But by and large, it is a bad scenario for the average Buyer to purchase a company under those Pricing terms.
If a company like that has proven the comeback is occurring and Revenues are on the rebound, allowances can be made. But what would it take for you – the Buyer – to turn around a 25% decline in Sales? Was this a case of the economy causing the erosion in the business? Did the Owner manage the business correctly and actually soften the decline, or did he make it worse? How much more money might you have to spend, in order to get back to 2008 levels?
Moreover, is this really a Company poised for a rebound? With a record of three years in decline, was it really the economy, or is that Company simply in its business death throes? Until it can mount its own proof of a potential recovery by demonstrating some semblance of increased Revenue and Profit, there is potentially no way to know, until you take the reins.
Unless, of course, you really know the market and have done a ton of research into both the industry and the Company. Then you may want to consider a turn-around acquisition.
But if YOU are going to turn that Company around, why should you pay the Seller a huge premium for the privilege of doing so?
The point is that any time is the correct time, if you learn your prospective business well, and how to put everything into the proper perspective.
(Receive in-depth, personal consulting online, with The BAF Group’s principal at https://clarity.fm/donaldbarrick .
The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service. Its Principal Broker possesses 25+ years of Business Sales and Divestiture. Although most of our work is involved in the Mid-Atlantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well. Some of our listings and additional information about us can be viewed at www.bafgroup.com. Thank you for your interest.)