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Is now – December 2016 – a Good Time to Buy or Start a Business in the USA?

December 1, 2016

As this post is being written, it is 1st of December, 2016.  We are almost one month after an historic, divisive presidential election, and the president-elect is Donald Trump.  Mr. Trump is himself, a divisive, complicated man, marked by mood swings, changeable positions on public policy, and indistinct as to his true intentions in fiscal and social direction.

Within the past several days, OPEC somewhat severely reduced its oil output, and petroleum prices increased overnight, in a dramatic manner.  The US Federal Reserve has almost guaranteed that Interest Rates will go up later in the month.  And Mr. Trump and the Republican majority in Congress has emphatically stated that the ACA (Obamacare) will at least be radically changed, if not completely overturned and swept side.

What the heck is anyone to do in trying to make a decision over whether to start or buy a business, in this tumultuous time in US history?

And frankly, there is no clear-cut answer.  There are certainly some considerations that can be made or discussed; but to some degree, the ultimate decision will unquestionably have to be made by specific individuals, solely related to their specific plans for their particular business concerns.

The most sweeping generalization that can be made is that, in any change, there is opportunity.  Whether it is the election of Donald Trump, or the alternative of Hillary Clinton, change was going to be certain.  And again, that change would unquestionably spawn such opportunity.  Whether the change is good or bad – and we offer no editorial opinion on whether Mr. Trump’s election is either good or bad – that change will generate needs that will offer a chance for some businesses to flourish.

The question is, what businesses will flourish?  Because there may also be businesses that offer reduced opportunity by this change.  And as can be seen from the first two paragraphs of this post, the presidential election is only one of many changes going on at this time.

The results of the presidential election is certainly the most visible of these issues, and perhaps one of the most difficult to project, from the perspective of attempting to plan for future needs or impact on the Economy that might also impact a decision on what business to start or purchase.  Mr. Trump’s initial promise to overturn Obamacare as soon as he is in the White House is unquestionably a concern to anyone contemplating entering the healthcare industry.  But in our view, Obamacare will not be completely eradicated; it is more likely a situation where it will be radically changed, hopefully for the best.  The result could well be that someone looking at purchasing or buying a health-oriented business should look toward basic health needs, rather than super specialties that might suffer the most.  Diagnostics should theoretically be safer as an investment, particularly if they are based on lowering costs of alternative diagnostic systems.

Real Estate investment is also a murky area.  Mr. Trump and the Republican-controlled Congress have made a number of statements that suggest that Real Estate investment could be in jeopardy.  Republican Senators and Congressmen have wanted to do away with Fannie Mae, for a number of years now.  Fannie Mae is the entity that assists homebuyers in obtaining loans that banks might not wish to offer them, without assistance from that governmentally supported operation.  Fannie Mae is one of the many entities blamed for the 2007 recession; it’s finances are complicated and have historically been largely hidden by its management.  Congress is in many ways justifiably concerned, but if it is removed completely, buying a home will be out of sight from many US buyers.

Even more of a concern is the Republican intention to completely remove Mortgage Interest as a deduction from the US Tax Code.  This would even further reduce home buying, and all of the jobs and businesses surrounding home purchases and Real Estate, in general.

These last two issues are very confusing, since Donald Trump is at heart, a Real Estate developer and investor.

The OPEC issue is a concern for virtually everyone.  Gas Stations in particular, suffer any time gas increases substantially.  People will, at least temporarily change their driving habits.  A large amount of the change will revert over time, and once people get used to the higher prices they are forced to pay, most will go back to their previous driving patterns.  Gas sales will then increase, almost to historic numbers.

The real issue for Gas Station owners is that, because current pricing may also be accompanied by lessened availability, Gas Dealers operating non-branded stations, or stations with lesser brands could find themselves lacking supply.  We have seen this several times over the past couple of decades, where the people in the Middle East disrupted oil imports into the US.  Companies like Exxon and BP were able to maintain their supply to their own stations, but non-branded stations in many cases were forced to close their doors for days and even weeks at a time, because they could not obtain gasoline inventory for their own tanks.

The issue of interest rate increases may be much more imagined than real, at least for the short term.  The Federal Reserve (Fed) threatened an increase in the fall, which did not occur; but it has virtually guaranteed one will occur at its December meeting.  Moreover, economic gurus aligned with the upcoming presidential administration have voiced their displeasure with the Fed’s decisions for the past several years, stating that the Economy of the United States has been less than robust, specifically because of the actions of the Fed in keeping interests at such low levels.  Their opinions are that lower Interest Rates have caused the stock markets to rise as a result of corporate investment, which has in turn been a result of lower Interest Rates.  They see even higher potential stock market increases when Interest Rates rise, because there will be less corporate investment, yielding higher profit reports, which in turn will increase investment in corporate stocks.

Others see the stock market as already too hot and too high, and believe the stock market is ready for an “adjustment”.  That is a euphemism for another recession.  It may be that both of these differing opinions are correct; it is also equally possible that neither of them is correct.

The short term effect of a Fed interest rate increase is probably negligible, in terms of its real impact on the Economy.  The December rise is seen as potentially no more than one ¼ of 1%.  This would cause investors and people looking to purchase or start businesses to be concerned, but the overall impact on a purchasing decision would ultimately be relatively low.

The long-term effect is much more concerning, because the Trump administration would probably replace the current officers of the Fed, all of whom are nearing the end of their terms.  A new management team may enter with a completely different philosophy that could increase Interest Rates substantially over the ensuing years.  Again, we make no judgment as to whether this is good or bad; it is a matter of attempting to determine how to deal with it, if one is attempting to make decisions regarding its own intentions with respect to small businesses.  Whether Interest Rates remain at somewhat low levels, or rise substantially, business people will have to make decisions.  And  they should think through both sides of the equation, in an effort to allow themselves to react quickly, if and when something significant does occur.

Keep in mind that, if you have a business concept in mind, and you believe it will survive and even grow in the coming months and years despite all of these economic and governmental gyrations, virtually everyone will be affected by Interest Rates.  A competitive impact on any given business may not be a substantial detriment, unless the owner is so terribly leveraged that he/she is solely dependent upon a mammoth amount of ongoing borrowing, in order to survive.

To some degree, the process of buying a business may demand more attention with respect to the pricing, but not necessarily kill a deal.  The business Seller may be more profoundly affected than the Buyer.  This is because the Cash Flow of small businesses is what normally dictates the selling price.  This is particularly the case if the business is large enough to require a lender to become involved in the acquisition.  Lenders will examine how much Cash Flow historically exists, deduct the Buyer’s own personal and professional financial obligations, then determine whether there is sufficient profit to pay the lender, at current Interest Rates.  That historical Cash Flow is viewed as relatively fixed.  The Buyer’s own personal Cash Flow needs are also somewhat cast in stone, depending upon his/her current expenses for things such as home mortgages, car loans, utility bills and credit card payments.

The amount of Cash required for paying a business loan, (Debt Service,) is then also fixed, dictated by the bank and SBA.  What would then vary is the amount to be paid for the business itself.  If the interest rate rises, it represents a larger portion of that remaining Cash to be used for Debt Service, reducing the amount available to be paid for the business itself.  So as Interest Rates rise, prices would normally stabilize or even come down.  The Seller can do one of three things:   (1) He/she can sell it at a lower price, dictated to a large degree by the Cash Flow and the amount allowed by the bank; (2) He/she can attempt to maintain a higher price, and provide easier terms for the prospective Buyer by taking a note, essentially acting as the lender or bank; or (3) the Seller can simply decide not to sell at this particular time, and wait until market conditions are more conducive to a sale at a higher price.

Finally, in trying to make a decision as to whether this is a good time to buy or start a business, and keeping in mind that such a decision is predicated upon decision surrounding specific industries or kinds of businesses, it is always, ALWAYS best to look toward businesses in which one already has experience.  Trying to project whether a business could be successful in the coming several years is going to be a somewhat difficult task.  Already knowing something about that business or industry can be a large part of that decision-making process.

As can be seen here, there are a mammoth number of variable issues.  And the ones cited in this post are but a few of those.

 

(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.)

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