We’re working with a company in Milwaukee right now that’s interested in acquiring one of our engagements. They’ve signed a letter of intent, but we’re still in negotiations.
Understandably, they’re a little nervous about buying in a business in an uncertain economy.
I asked them to look at today’s numbers and then look ahead to the future. They are in a position to buy the company now and structure the financing so current cash flows will support their debt and pay a reasonable return.
The purchase price is supportable in this market. Looking ahead a year or two, we can expect better financial times. When that happens, cash flows will go up and the return will be even better. Financing that makes sense now, is going to pay dividends in a healthier economy.
Still, I wouldn’t characterize this as a buyer’s or a seller’s market. Sellers continue to get strong prices, but buyers are getting better structures. In many cases, sellers are carrying a larger portion of the financing, and that means they have a greater interest in the company’s continued success, we are now seeing 20% +/- 5% seller financing.
That’s exactly why these deals are getting financed. Banks are telling us they’re still lending on these lower-middle market deals because the seller has more skin in the game than in previous years.
Personally, I can tell you from experience that starting out in a down market provides valuable management experience that will benefit you for a lifetime.
I started Cornerstone in 2001, shortly before the economy turned. It was a challenging time to start a business, to be certain. But as I look back, I realize that was probably a blessing because we learned how to work in that economic environment.
We didn’t have to let people go or learn to cut back because we were already operating lean. I learned from the beginning to keep a close eye on the finances.
Compare that to buying a company in a booming market, when little instances of waste seem irrelevant. All of a sudden times get hard, and you don’t know how to tighten your belt.
For companies looking to grow, like our buyer in Milwaukee, acquiring a going operation can be more affordable than organic growth. With economies of scale, they’ll reduce expenses and get stronger margins. They’ll take on proven sales people and benefit from other synergies.
We’re fielding more calls from strategic buyers than we have in quite some time. Despite all the doom and gloom in the papers, many companies in the lower middle market are doing quite well.
Economic news is changing day by day. By the time you read this article, conditions may have changed. As of right now, the credit crunch is not a credit halt, and deals are still getting done when price and the structure look right.
Scott Bushkie is President of Cornerstone Business Services, a low-to-middle-market M&A firm. Reach him at 888-608-9138 or [email protected]