Lately, given the current economic marketplace, many people have asked: “Walker, what do you think about the economy? Is it a good time or a bad time to buy a business?”
It is true, interest rates are increasing but from my experience – There is never a bad time to buy a good business!
Interest rates change constantly in any market. The average business loan interest rates range from 2.54% to 7.02% at banks, according to the most recent data from the Federal Reserve. But rates depend on many factors.
Right now, there are raising interest rates, inflation, and stagflation is being forecasted. As always, and as expected, the market is changing.
Economic predictions are only part of the picture
It is never a good idea to make decisions based solely on economic predictions.
If you really unpack today’s market, you can look at the US Economic Surprise Index. Yes. That’s a thing. The surprise index measures the accuracy of economic predictions compared to actual data releases.
In fact, the recent economic data that has been coming out is significantly higher than the recessionary forecast previously predicted over the last few quarters. This is just a case in point – that you can conclude economists are not that great at forecasting. There are just too many variables that play into this external thing they are trying to pinpoint.
Change is the only constant
I always focus on whatever is in my control because of the complexities of forecasting.
Buyers really like it when a potential business has been trending nicely for a long time. There’s a great reason for that – simply that the company has momentum. Obviously, it typically points to a lot of internal policies, procedures, and strategies in place. When a buyer is viewing a business this way, it can appear as though each day that goes by without ownership, is like losing money. Especially, if it just continues to trend up into the right. Or maybe it doesn’t, and change occurs.
The thought that change is the only constant, is not original of course. Heraclitus, a Greek philosopher, has been quoted as saying “change is the only constant in life.” I think many of us have a love-hate relationship with change. Certainly, when things are going poorly for us, personally or professionally, we can take solace in the fact that, no matter what, things are not going to stay the same. They might get better, or they might get worse, but they are going to be different. It is important to note that this will happen whether we proactively try to change our situation or not. Markets will change and businesses will change but your desire for acquisition entrepreneurship will remain.
Exit Terms
I have owned trending companies as well as companies that have been rocky. Knowing that change is the only constant, you can expect good times and bad times whether you’re buying a company that is trending great right before you buy or trending poorly right before you buy. Make business decisions and make acquisition decisions based on what an individual business will do with you as the owner and then compare that to both the acquisition terms and the eventual exit terms that you will have.
If you take a mid-to-long view (three to five years) envisioning that you will have something great, it may not happen as expected. The thing is, Success has nothing to do with what you plan and everything to do with how you manage through the unexpected.
A wiser approach might be a seven-year exit plan, because seven years is enough time to get a significant amount of equity buildup. Now, if your business overperforms and you do grow that business rapidly over a two-or-three-year period, you can always exit earlier, if that is what you want to do.
However, the only time you should really be thinking about exiting relatively quickly is usually during a turnaround situation. Because there is a lot of immediate growth to be created at that time.
If you take the recommended mid-to-long term approach, expecting good times and bad times, you can build a great business that can endure through the bad times and thrive in the good times.
The way you do that is:
- Great people;
- Documented processes and procedures;
- And plan to work, lead, and manage for the mid-to-long term.
Keep a Scoreboard
I like to always keep a scoreboard in terms of what my company will look like if I were to exit today; what would the exit price be?
In a privately held company, a scoreboard is the only way to have something like a publicly traded stock price indicating what the value of the company is on that specific date.
Again, work on your business because that is the thing that will get you through the bad times and to the great times. I have a brief personal example:
- 2006-2007 – I bought an $8 million revenue company just before the great recession. Things got pretty rocky in our industry;
- 2008-2013 – The business fell apart. We worked a lot and managed through the Financial Crisis of 2007-2008.
- ~2013-2014 – My first exit. When the economy rebounded, we were ready. We had implemented changes and caught some trends which kept us flat during the hardest times.
Ultimately, I got my first exit because of that. When making business decisions, I think a lot of times we are sort of thinking about, is this a good time, or is this a bad time? Everyone wants to buy low and sell high. The second you take that mid-to-long term view, you will have equity buildup and appreciation.
One assumption is that you are working in the business, and you will have an appreciation of value. Consistently, use a growth mindset and have faith that you are going to make it. Even in the darkest hour, you will make it because you are the one that is making the decisions.
You are piloting the plane while everyone else is in the back talking about economic forecasts.
Make good business decisions and do the math. What the interest rate is, whether prime is zero, two and a half, or six, or inflation is going or not, should have only a very immaterial impact on the business that you are operating.
There’s never a bad time to buy a good business. Keep that in mind.
Watch Walker as he talks about “How to Make Acquisition Decisions During Times of Economic Uncertainty” in this vlog here: https://youtu.be/63sE2sxJDng
If you are ready for the adventure of a lifetime in acquisition entrepreneurship, consider looking into Buy Then Build and one of our two online courses, which will help prepare you with more insider knowledge and experience.
Are you planning on buying a business in the next 12 months? Consider applying today to the Acquisition Lab, our do-it-with-you buy-side advisory service. You’ll gain access to world-class education, support from our team of experienced advisors, a suite of tools, and a vetted community to help you succeed in that first acquisition or in implementing a grow-through-acquisition strategy.
