The Time to Buy: When There's Blood in the Streets

Many of us are feeling the pain of the current market, tightened lending criteria, and uncertain economic times.

Currently, 45%- to 54% of Americans have a side hustle. Many of us are increasingly dissatisfied with working a W2 job where our paycheck is ultimately uncertain or without the ability to make a real impact.

We are seeking ways to hedge our bets while the job and housing market remains uncertain.

The reaction then for many is to hold tight. To keep your wallet clutched. To wait for the storm to pass. The contrarian investing “battle cry” is quite the opposite.

"The time to buy is when there's blood in the streets." - Nathan Rothschild

When things look most dire it is time to take opportunities that others will be afraid to seize.

Market Insights

The current economic landscape is challenging. Unique opportunities exist for savvy entrepreneurs.

Rising interest rates, inflation, and supply chain disruptions create hurdles, yet industries like healthcare and home services remain resilient and offer potential for growth.

Identify Better Opportunities by looking for these qualities:

• Focus on sectors with steady or growing demand
• Businesses with strong, consistent cash flow
• Companies that can scale efficiently
• Unique selling propositions that showcase your competitive advantage
• Great relationships with your resilient supply chains
• A long standing and loyal customer base

Economic Challenges:

Rising Interest Rates: Today’s SBA 7(a) loan rates range from 10.75% to 13.25% with express or fixed rates as high as 16.5% as of May, 2024.

Business buyers commonly fund their acquisitions through SBA and traditional loans which are subject to increased scrutiny from lenders. Many popular banks will not consider a loan under $1M and often impose rules about which industry acquisitions are outside of their risk profile. Benchmarks for a strong DSCR (Debt Service Coverage Ratio) have increased disqualifying everything beside the reasonably priced and healthy operating businesses.

For example, the business operations must be approximately 13.95% more profitable to cover the same loan payments with an 11% interest rate compared to a 6% interest rate. If you increase that rate from 11% to 16.5% there is another increase of approximately 14.35%.

Combined with inflation driving higher operational costs and the employment challenges in the U.S. for skilled trades, and ongoing supply chain disruptions; the outlook is relatively bleak. If I haven’t scared you away yet, you might be reading the right newsletter.

Where there is fear and doubt, there is opportunity.

4 Solid Industry Examples:

• Healthcare has seen recent revenue increase by 8% in telehealth and home care.
• Home Services have seen a sustained demand and 5% revenue growth in improvement and repair. Several sub-categories of business support the home repair, infrastructure, and essential services.
• Technology Services experienced 7% growth in IT and digital services combined with expansion in cybersecurity and driven in part by increased remote working, and work-share solutions.
• Education within niche and specialized education services and training programs continue to grow in popularity with crossovers in the home services, technology, and healthcare industries.

The Boomer Exit

Baby Boomers are now between the age of 57 to 75 years and reaching retirement. A significant number of the boomer-owned businesses are looking to sell or close up shop. This "Boomer Exit" trend is creating a surge in available businesses, particularly in industries like manufacturing, retail, and professional services.

There are far less SaaS and E-commerce opportunities in this demographic - **think: no glamor, all grit. The “get your hands dirty” and get shit done type of owners that built and established themselves through several periods of economic strife.

For the unafraid, this presents a golden opportunity to acquire established, cash-flowing businesses.

Of the estimated 10 million businesses owned by these seasoned entrepreneurs, many are within the sights of private equity or strategic investors looking to absorb their aging competition. In the past, owners would have a succession plan and hand off their legacy to a family member which has become increasingly less common.

There’s blood in the streets now for certain. Many professional searchers are looking for the right businesses for other established owners to acquire. Competition for the best of the best will be fierce.

It’s important to stay on top of the trends, come up with a consistent strategy, and get yourself in front of the owners. Have a pitch ready that showcases your unique proposition, builds trust, and highlights your bright and likable demeanor. Just because there’s blood it doesn’t mean you need to be a shark.

My approach for off-market owners is often that of intrigue and appreciation. I love my community, I want to see it thrive, and no one has more interest in their community as a whole than small, local business owners. They provide jobs, repair and maintain critical infrastructure and client properties offering benefits for the owners and maintaining or increasing property value for everyone in the vicinity. It’s not hard for me to be genuine about that sentiment because I feel it in my core.

For that reason building rapport and negotiating with retiring owners is within my comfort zone. (I think I see a deep dive subject in the making.)

Boomers with Benefits…

The benefits to acquiring well-established businesses from retiring owners can be an exhaustive list. I have even begun to see gaps in certain operational areas simply as opportunities to increase revenue and decrease costs.

Keeping it simple, they typically share some common traits making them attractive to first time and seasoned buyers:

1. Established Customer Base - Loyal customers hold their value year over year and allow you to easily calculate the lifetime value for new customers and project growth into the future with confidence.
2. Proven Business Model - 10 + years of consistent revenue and profitability is a great indicator of future stability (with the right ownership).
3. Brand Recognition - Establishing yourself in a new market is challenging against existing competition.
4. Favorable Purchase Terms - Relationships will drive your success in this area, but with the urgency of retirement on your side there are often more options for creative deal terms.
5. Potential for Modernization and Growth - Many boomer businesses may not have fully embraced modern technology or marketing strategies. This presents an opportunity for the new owner to introduce innovations, streamline operations, and implement digital marketing to expand the business.

S.M.A.R.T. Acquisitions for Success

For the engineering and tech types out there, the SMART acronym will sound familiar. Put of plan of action and timeline on your strategy and keep your goals on track.

S – Specific

• Clearly define your acquisition objectives.
• Get clarity on your deal size, profitability metrics, and ability to manage debt repayment - frame your target acquisition to these metrics.
• Are you looking for a specific industry, geographic location, or size of business?
• Identify the exact qualities you seek in a target business, such as customer base, revenue, or unique competencies.

Know the Disqualifying Red Flags:

• Vague or inconsistent information from the seller with a “take it or leave it” attitude.
• Unclear business records or a lack of specific financial data.

M – Measurable

• Set measurable criteria for evaluating potential acquisitions, such as revenue thresholds, profit margins, or market share.
• Record and track the number of owners you’ve contacted, had meetings with, and received financial documents from.
• Keep track of the number of LOIs submitted and the due diligence timelines established.
• Establish benchmarks for post-acquisition performance to track integration success and return on investment.

A – Achievable

• Ensure the target business aligns with your resources and capabilities. This includes financial capacity, management expertise, and operational capacity.
• In other words, don’t go after businesses that you cannot reasonably find a way to fund and operate.
• Plan for achievable integration processes and timelines with a “First-90-Day” framework.
• Don’t rely on the seller’s overambitious growth projections or promises that seem unrealistic (and remember you’re paying for past performance, not the future potential value that YOU will achieve)

R – Relevant

• Focus on businesses that align with your strategic goals and long-term vision.
• Ensure the acquisition complements your existing skills and enhances your competitive advantage.
• Avoid businesses that operate in a declining industry or markets that are not relevant to your core business or cultural misalignment between you and the target business.

T – Time-bound

• Set a clear timeline for your outreach strategy, time for initial review, and time before submitting an LOI in order to keep pace and establish self-accountability.
• Know the potential timeline for each stage of the acquisition process, including due diligence, negotiations, and integration. Your LOI should also clearly state that diligence timelines begin when all evidence has been received and include contingencies for additional time if needed.
• Establish milestones to ensure the acquisition stays on track and to measure progress.

Applying the SMART criteria to your acquisition strategy will enable you to create a structured and disciplined approach to identifying and evaluating potential businesses. Remain vigilant for red flags, and ensure you make informed and strategic acquisition decisions.

Extra Tips for Evaluating Businesses in a Crisis

• Look for: Businesses that held fast or increased sales during the pandemic AND maintained a sustainable profitability afterward. Industries with high demand regardless of market conditions - essential businesses.
• Red flags to watch for: Customer concentration in a single segment. Large percent of business attributed to a small number of contracts or customers. Unaccounted for “cash” transactions added to the Net Profit and SDE calculations.

Quick Announcement!

Next Monday I’ll (FINALLY) be releasing our “Serious Buyer’s Playbook” completely free! This guide will help you build credibility and instill confidence in sellers and reveal key steps in positioning you as a serious, qualified buyer. It includes 7 Proven Tactics to demonstrate your credibility and close deals.

Avoiding Pitfalls

After reviewing more than 400 different businesses I have seen some recurring issues that are easy to avoid.

When buying in a down market funds will be difficult to source, and lenders will tighten their grip - be ready to address their concerns and understand how to best present yourself:

• Confidence is key - if you show uncertainty in the business, the financial performance, or have a poor picture of the overall risk; it will be much harder to convince anyone else to cover your financial needs.
• Understand the business financially - the purchase price, the resulting debt service (as best you can estimate it), and your recurring working capital needs.
• Be ready to present yourself as the ideal operator - show your notable experience in the industry and firm understanding of the operational needs of the business. (Lenders will often deny funding if you or an equity partner do not possess adequate industry experience.)
• Don’t offer more than the asking price without good reason. There are some circumstances where this is a good idea, but PLEASE don’t arbitrarily increase the price just to feign confidence.
• Have a solid due diligence template ready AND adapt it to fit the target acquisition - be thorough, but understand that many off-market owners will not have some of the modern documentation you expect.
• Practice your negotiation skills. I negotiate everything because I think it’s fun… Apparently that’s an unusual quality. If you feel uncomfortable negotiating I’ll be more than happy to help negotiate on your behalf.

The path to financial freedom through strategic acquisitions is lined with challenges, but also with immense potential. By staying informed, prepared, and proactive, you can turn today's economic uncertainty into tomorrow's success.

Let me review each deal with you and show you how to buy the RIGHT business with 1 on 1 coaching! When you're ready, let's get in touch with a quick, FREE session to understand how we'll tackle your business buying strategy together.

Take it to the Streets!

I truly believe that we are in the position now to experience the greatest wealth transfer in generations. Those willing to step into the arena and be ready to fight for our success will leverage the current uncertainty and experience unprecedented returns.

Make a SMART plan that aligns perfectly with your financial goals - get ready, and start today. There will never be a better time to learn the ropes and buy your first business.

If you can see our hard times, our dissatisfaction with the status quo - you, like me, see the blood in the streets. It's time to buy.

And so - Here's to your lasting success,

Sage Price