Strategy in an uncertain economy??
October 19, 2022
by a searcher from Brigham Young University in Lehi, UT, USA
Recently had a talk with a business school professor about the SMB acquisitions market today and general uncertainty in the US and word economic environments. I’m curious how everyone is preparing/looking ahead over the next 2-4 years.
Searchers how are you adjusting your search given the uncertainty, if at all?
Operators how are you preparing your business to weather storms? Specifically curious for those that have SBA loans currently.
in Denver, CO, USA
. Hello Friends! . If you're worried about how to close deals in a recession, fear not and read on! . There are pros and cons when it comes to closing deals in a recession and in the current economic climate, to be more exact. The main benefit for business buyers is that sellers are scared and more motivated to sell. But on the other hand, higher interest rates mean that companies need to have a higher net profit to support debt and have a healthy debt coverage service ratio (DSCR) for leveraged buyouts (LBOs).
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Calculating DSCR
. Here is how to calculate the DSCR to see if a company can support debt. A DSCR under 1.5 is a red flag, and 3 + is a smoking hot deal. Loan amount: $240,###-###-#### Loan term: 10 years Fixed Interest: 6.062% First, Google search for "mortgage calculator" and scroll past the first ad(s). Enter the total loan amount of $240,###-###-#### Enter the loan term; an example SBA loan would be 10 years. Enter the interest rate of 6.062%. On the right, you'll see your monthly debt service of $1,###-###-#### So, the target company's free cash flow (net profit) should be at least 1.5 times $1,###-###-#### or $2,173.50 ($2,173.50/$1,449.00 = 1.5), but a 1.5x DSCR would only leave $###-###-#### to run the business. An even better 2x DSCR would be 2 x $1,449.00 = 2,###-###-#### in monthly free cash flow. The DSCR equation = (free cashflow) / (monthly debt service) = DSCR. So, if the example company had $10,###-###-#### in monthly free cash flow, you would calculate: $10,000.00 / $1,449.00 = 6.901 DSCR. This means the company can support the monthly debt service 6.9 times per month. All this means is that if interest rates are double what they used to be, your deals have to be twice as good. Creative Deal Making On the other hand, if you have other assets, you can leverage them for cheaper money examples would include government bonds, employee retention credits, and insurance policy loans. You can also push for high levels of seller financing with enticing earn-outs that include ballooning profit interests, and equity for the seller in the newco. Asset Heavy Deals With the market contracting asset heavy deals are getting funded much more quickly right now. Here is the list of industries that aren't slowing down: Assisted Living Hospice Commercial Cleaning Auto Shop Construction Real Estate Real Estate Development Health Care Oil & Gas Clean Energy Manufacturing Yachts Exotic Cars Watches Art Unreplicatble Collectibles Remember that accountants run the world, and they need collateral that they can see and touch! And everyone can win when rates are low; it’s the truly disciplined entrepreneurs that succeed when rates are high. Hopefully, you found some value in this short article, and keep an eye out for the next one.
https://open.substack.com/pub/asebizgrowth/p/the-ase-fleets-weekly-take-off-17?r=3fafq&utm_campaign=post&utm_medium=web
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from The University of Michigan in 1075 Gills Dr, Orlando, FL 32824, USA
As for searchers, based on the conversations I've had with business owners I know that have been considering selling, I think you'll see deal flow slow down. Unless owners have to sell, they are most likely going to wait out the poor market conditions and sell at a higher valuation in a few years.