Another possibility is that when prospective buyers can't get their hands on enough capital to finance deals, their numbers may shrink to approximate today's reduced ranks of would-be sellers. Would enough bargain-hungry corporate buyers show up to compensate for the absence of individual buyers? Probably not, if corporations themselves are kept on tight credit leashes, as they are today. So if the numbers of buyers and sellers decline, the M&A marketplace could remain in a state of chaos for quite a while.
The news from the front lines, at least for now, supports the more pessimistic forecast. Business broker Mike Sharp says, "There's no doubt that in the last 18 months we've seen a much higher number of deals that have failed to happen because financing wasn't available." The software developer, the telecom service, and the distributor of semiprecious stones all lost deals because the buyers couldn't borrow the funds they needed.
"I hate the words tight financing because it makes us seem like Ebenezer Scrooge," says Brett W. Kaplowitz, a senior vice-president at Potomac Valley Bank, based in Gaithersburg, Md. "The way I'd describe the situation is this: We're seeing more cautious financings and more prudent financings. There's more scrutiny going on when it comes to acquisition financing than has been the case in recent years."
Here's how bad things have gotten. "Most of the cash-flow lenders have dropped out," Sharp explains. "The only kind of deals that are easily financed are the ones with plenty of assets to borrow against. And if you do find someone willing to lend against cash flow, you're lucky if you can borrow two and a half times cash flow -- whereas a couple of years ago, you could easily do a 'four and a half times' financing."
In a tight-money environment like this one, it can take a lot of give-and-take to actually close a deal. Sellers may have to agree to a long-term payment plan for part or all of the transaction or lease big-ticket machinery to the buyer.
On their end, buyers need to finance more of the purchase price themselves. That puts people with hefty retirement accounts or severance packages in the driver's seat -- and helps put the kibosh on "handyman specials" that require big infusions of capital in order to clean up problems or pursue growth prospects. How crazy have things become? Business brokers report that a few extraordinarily motivated shoppers have started taking their bankers along with them from day one, just to avoid wasting time exploring deals that they won't be able to finance.
When a weak economy makes acquisitions seem risky, as it increasingly has during the past two years, a vicious cycle takes hold. Buyers wanting to make a lifestyle change or to replace a corporate career may have a hard time getting acquisition capital. Yet from a banker's perspective, that's simply a cautious investment decision. After all, as Kaplowitz explains, "individuals or companies looking to purchase a business in a nonrelated or unfamiliar industry may be turned down by a bank if they can't show management competence or if the existing management is not remaining in place to help train the new owners and ensure a smooth transition."
For sellers, that is the reality as we now know it. Instead of banging your head against the wall, plan ahead to make your company as easy as possible for a future buyer to finance.
"There are two major ways to do this," says Fred Marcusa, a partner in the New York City office of law firm Kaye Scholer. "First and foremost, you've got to have an economically viable business, because nobody is financing ideas or the possibility of a viable business anymore. And then you've got to look for ways to build valuable assets. The obvious ones are inventory, receivables, equipment, real estate. But if you've got a service company, you've got to be more inventive. Try to arrange long-term employment deals with your staffers or sign extended contracts with your customers or key suppliers. You've got to convince both a buyer and a banker that you've got assets." Fail to do that, and you may find your company in the same position as the mid-Atlantic title-insurance brokerage: just plain unsellable.
The risks abound. And the rewards generally aren't what they used to be. Yet business owners can still find a pot of gold at the end of the rainbow. They just have to keep their sights focused on tomorrow (by building a company with strong growth prospects) while remembering yesterday (by ensuring that their record of success is strong and well documented by credible financial statements) and paying attention to today (by proving that they can not only survive but also thrive within the current rough-and-tumble environment).
That's the secret behind the success of the one Business for Sale candidate that sold for more than its asking price -- $1.75 million more, in fact, than its $2.25 million listing in the pages of Inc. For 22 years the southeastern seafood distributor financed its growth with cash flow (the past). The company also had plenty of untapped expansion opportunities (the future) and an owner who, rather than allowing himself to get distracted by efforts to sell the company, kept achieving steady growth despite the weakening economy (the present). And the kicker: in a tough marketplace, the owner threw in the real estate instead of insisting on a leasing arrangement, as he had originally wanted. All that added up to a package that was just too sweet to resist.
