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The "R" Word

Why would anyone buy a business prior to a re..rec…recession? 

There, I said the R word.

It seems like every week, we hear someone predicting the next downturn in economic cycles. After all, we’re in the longest running positive growth periods in history.  Playing the odds, a downturn will happen at some point. So if that’s the case, why would anyone buy a business prior to a recession?  Here’s some counter-points to consider:

  1. No one can predict with any certainty of when, how severe, or for how long.
    1. There have been people predicting a downturn since the Dow was at 20,000 in Jan of 2017. People who exited the market or people who decided not to buy a business at that time have not participated in the 7,000 point run up or last two years of great business operating earnings.  The same business today would probably cost quite a bit more than it did in 2017.  No one can predict when or if it will occur.
    2. We all remember the worst case scenarios like the Great Recession, but most down turns aren’t as severe. What is the most likely extent of magnitude of the next downturn.   No one can predict how shallow it will be.
    3. We’ve experienced multiple downturns in stock markets that are short-lived. No one can predict how long it will last.
  2. The lending climate is healthy today. Waiting for a downturn may make financing more expensive, difficult, or sometimes impossible.
    1. Interest rates are historically low and competition between lenders is high. Increased interest rates can eat a lot of cash flow even with potentially lower business purchased prices.
    2. Current lender competition and current SBA requirements can change after downturns and make financing more difficult. It may take more cash down payment, meaning you have to downsize the scale of businesses that you are capable of purchasing, or financing may just not be available at all.
  3. There are “recession-proof” businesses out there to buy.
    1. Non-discretionary spending based businesses often survive and thrive during downturns. Look for businesses whose customers will still need to give them money in poor economic times. Essential services and goods, i.e. people spend more on repairs instead of buying new during economic downturns. We will still need healthcare, oil changes, shaving, leaky roof repairs, and meat on the table.  Many businesses have contractual recurring revenue which are strong assets today.
    2. Typically, the business multiples of those essential services and products companies are lower compared to sexy discretionary spending businesses during growth periods, and their multiples start increasing in downturn environments. Now may be the time to buy those service businesses.
  4. Where’s the real security in a steady job and paycheck during an economic downturn anyway?
    1. Business slow downs, cut hours, relocations, and lay-offs with down sizing doesn’t sound all that secure.
    2. Many people who planned on working at the same job until retirement, don’t get the chance to execute that plan. Middle management positions seems to take a disproportionate hit in down-sizing.
    3. Buying a business and being in control of your own destiny can potentially be more secure than a 9:00 to 5:00 job. It’s much less stressful and you make better buying decisions when you can make a purchase on your time rather than after you have been laid off and you’re worried about your savings burn rate.

    Everyone’s natural fear is paying too much for a business that looks rosy today, and may not generate a sustainable cash flow in an economic downturn. Don’t let that stop you from looking. Be diligent and realistic with your business plan.  Stick to your budget. You are in control of how much you spend. Be ready to capture the right opportunity.

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