Selling Businesses: Where’s the Demand?
27 March 2023: Selling Businesses: Where’s the Demand?
As professional business brokers, it’s a good idea to have some sense of where the demand is when selling businesses. This is, of course, also a pretty good thing to know if you’re a business owner contemplating the idea of selling.
“Demand” in this context can mean two different things. First, there’s general market demand exemplified most clearly by the pre-pandemic buying frenzy in the general marketplace that was fueled by low interest rates, rising equity (stock) valuations and the abundance of capital schloshing around the world looking for a productive place to land.
But there’s also the demand one identifies for certain types of businesses; “industry-channel” demand, if you will. Industry-channel demand becomes more prevalent when buyers must be more discerning in their acquisitions.
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Demand, quite naturally, shifts a bit as economic and political conditions shift but even with such shifts, demand for profitable, well-run businesses will always exist. But said economic and political conditions have recently been a bit unsettling and general market demand has changed a little.
Over the past 18 months or so, we’ve seen the acquisition costs of buying a business increase by way of the increased cost of financing such acquisitions as a result of higher interest rates. We’ve also seen the impact of inflation on inflation-sensitive businesses as top-line numbers, unable in many instances to keep pace with inflation, suffered thereby impacting, to greater or lesser degrees, bottom line numbers and, thus business valuations. These issues would, naturally, impact market demand, especially in certain industries such as retail.
But we’ve also been seeing general market demand get support from a buyer cohort originally considered somewhat restrained: private equity.
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Private Equity
Until recently, private equity groups (PEGs) enjoyed a nearly unlimited field of opportunities to choose from; there were a lot of very tempting targets in their field of fire. Yes, many PEGs specialized and therefore had industry-specific targets but their target industry was chock full or worthy targets. But “industry” is only one of the criteria used by PEGs.
Another was financial specifications.
We continue to get contacted by PEGs looking businesses to buy. Granted, though the frequency with which we’re being approached by these buyers has fallen off somewhat, we’ve noticed a distinct change in many of the appeals we now receive. That change is a lowering of financial criteria; specifically, the earnings floor has dropped.
In the past, we seldom received any inquiries from a PEG with a minimum EBITDA of less than $1 million and revenue lower than $5 million. But about a year ago, we started seeing search criteria that included EBITDA as low as $500,000 – and a revenue number was conspicuously absent. PEGs were becoming interested in smaller businesses.
What’s driving this change is that PEGs raise their capital from private investors, money managers, some family offices, occasionally by pension funds and the like. The private equity group does so by promising its investors that it will invest their money in profitable businesses and suggesting it should be able to run those businesses in a way that will generate a return of X within a certain period of time. The key issue here is “within a certain period of time.”
PEGs have to invest the funds they’re entrusted with early enough to give them a chance of actually generating the promised return because the PEG’s managers are under a significant time restraint; they have to return their investor’s capital by a stated date; generally no longer than 10 years out. The longer the managers have to achieve a return, the more likely they’ll succeed.
But there’s a significant consequence if the fund’s managers can’t find businesses to acquire that meet all their criteria, a condition the market is currently presenting to us. When this happens, the PEG has to return its capital to its investors – a circumstance PEG managers loathe. Rather than suffer the ignominy of returning capital uninvested, some funds modify their criteria, an event that often manifests itself in lower financial “minimums”.
That’s what we started seeing about a year ago.
Industry Demand
Selling businesses successfully requires an understanding of industry demand, as well. What industries are likely to be least impacted by – or are better positioned to withstand – the various challenges presented by current financial or political turmoil? Where would someone selling businesses look for the most fertile ground?
Well, service industry businesses offer more immunity to interest rates than others – such as manufacturers, inventory-intensive and construction-related businesses – that depend to a greater or lesser extent on financing. Similarly, industries that depend on their clients’ or customers’ ability to get financed – real estate-related industries, for instance – will be impacted negatively by higher rates and other economic uncertainty.
Just this past week, the U.S. central bank raised its benchmark rate by another .25% even as several high-profile banks collapsed and The Wall Street Journal published a report from the National Association of Realtors that stated that real estate sales were down 22.6% from a year earlier, sales had decreased for 12 consecutive months and the median home price in the U.S. fell for the first time in more than a decade.
Service industries, especially those that their clients or customers can’t do without – such as accounting firms that focus on corporate clients, commercial facilities management companies, contracting maintenance businesses (HVAC, landscaping, roofing, tech, etc.) – are all in demand.
Healthcare is another strong channel. As populations around the world age, the demand for all matter of healthcare – from wellness training businesses and nutrition centers to chiropractors and medical instrument companies will continue to see strong demand.
The demographic cohort driving this trend is the Baby Boomer generation, members of which are hitting retirement age at a rate of 10,000 every day.
An Additional “Plus”
An interesting by-product of this demographic cohort impacting certain industry channels can be seen clearly from where we stand. Baby 
Boomers, supposedly the most prolific generation of business owners in history, are heading for the exits.
If you’re a business broker selling businesses, this fact – what we refer to as the Silver Tsunami – means that the number of businesses coming to market over the next 10-15 years is expected to be unprecedented, a condition that is projected to increase the demand for professional business brokers and knowledgeable real estate agents trained to know how to value, package and sell businesses.
The Bottom Line
When selling businesses for a living, we have to be aware of various market trends some of which, hidden under the headlines, are not always easily discernible.
We can recognize that businesses providing healthcare to an aging population will likely enjoy significant demand from buyers. But there are businesses that supply those healthcare providers that are just as likely to do well and just as likely to be of heightened interest to buyers, both strategic and financial.
For example, in the U.S., recently-passed legislation known as the Chips Act (which started out as a $52 billion bill to bring chip manufacturing (computer, not potato) back to the U.S. when someone finally realized that 98% of all the chips used in every single product we buy come from Taiwan, which China is gearing up to invade but, with a final price tag of $280 billion, ended up looking like the proverbial Christmas tree with all the extraneous and unrelated crap that was hung on it) will also benefit companies other than Intel, Micron Technologies, AMD and Nvidia, among others. What companies make the chip-making equipment that the chip makers need?
For a far more prosaic and easily-grasped example, consider what happened during the mid-19th Century in the midst of the California Gold Rush. Tens of thousands of men left hearth and home to descend on the San Francisco Bay area in search of the ever-elusive vein of gold.
Few of those men ever made a nickle. But the men who sold the shovels, the picks, the whiskey, the digging rights – the people who sold what the miners needed – made a fortune.
Selling businesses becomes easier when you have “products” the buying market is looking for. If you’re business broker, business owner, or even a real estate agent who wants to move up to the “bigs”, knowing what will likely sell needs just a little thought – and a price related to value!
I’d like to hear from you. What topics would you like me to cover? How can we tailor these posts to be more useful to you and your business. Let me know in the comments box, below, or email me at jo*@Wo*******************.com.
If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.
Joe
Searching For…
We received an inquiry from an investment company in the midst of a roll-up looking for opportunities to acquire residential home services businesses (HVAC, plumbing and electric) throughout the U.S.
If any of you know of something that might fit, please let me know.
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The author is the founder, in 2001, of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 500 in the world. He can be reached at jo*@Wo*******************.com