Each downturn I have lived through produces the same conversation among business owners weighing an exit. Is now the right time to sell? Should we wait for conditions to improve?
Rarely in the SME world do people appear, asking the counterintuitive question: Is now the right time to buy?
I have watched this pattern repeat through more than one economic cycle, and it seems not to have changed. Owners sitting on the fence about selling spend months, sometimes years, waiting, and trying to “pick the market,” looking for a turning point that never arrives on schedule and that certainly never announces itself.
Meanwhile, a different set of opportunities sit largely unexamined: plant and equipment, staff, client lists and geographic reach, available to buy at levels well below what they would command in more settled conditions.
Why does nobody talk about this? Perhaps it is because (like the firm that commissioned me this week to act as their buyer’s agent) the people who do act in this way, wish to go quietly about their business. Unchallenged buyers in an uncontested market.
Or because many SME business owners believe this type of behaviour sounds like something reserved for the big end of town, for listed companies with corporate development teams and balance sheets built for opportunism.
It is not. The same logic that drives larger mergers and acquisitions, buying for market share or for product depth, applies just as soundly to a modest-sized business. Everybody, at one time or another, seeks to acquire a competitor’s client list or to absorb a struggling supplier’s equipment and staff at a fraction of replacement cost.
Here are some facts that elevated costs and cautious conditions tend to obscure. The number of business owners with long trading histories and genuine experience who simply become worn down by the external conditions is not small, and it grows in a recession.
Instead of turning inward when margins tighten, look outward for growth opportunities that are presently trading beneath their true cost.
It is worth being direct about what being worn down looks like from where I stand. It rarely announces itself in the market until after the event, and in no way am I representing it as a failure. It looks like an owner who has traded soundly for fifteen or twenty years, who built something genuinely worthwhile, and who has simply run out of the energy required to fight through the present difficult season. Weariness, confusion, and the absence of a visible alternative persuade a great many capable operators to close the doors for the final time, not because the business lacks value, but because the owner has reached that point where age and weariness prevent them seeing a path through to realising it.
If anything, this is a criticism of the “ten-foot tall and bulletproof” attitudes of young entrepreneurs. I used to be one of these. I looked at businesses like these and saw only what they lacked: tired systems, ageing plant, an owner who no longer seemed to want it badly enough. It took me far too long to understand that I was looking at my own future and mistaking it for someone else’s failure. The owner winding down after twenty years has already done the thing the younger buyer is still attempting. They have carried a payroll on a personal guarantee, held staff through a downturn, and made the hard call more than once. That is not weakness dressed up as fatigue. It is a full career, spent. Anyone approaching that owner from a position of superiority should remember that in twenty years somebody will be sitting opposite them, thinking the same thing.
There is a commercial point buried in that humility. Begin with the physical attributes, because they are the easiest to see and the easiest to underprice: the shed and its fit-out, the forklifts and delivery vehicles, the workshop plant that has been maintained rather than run into the ground, the racking and the stock that sits on it. Assembled from scratch, that list costs a good deal more than the business will change hands for, and takes far longer to bring together than most buyers allow for. But none of it is what wore the owner down. What wore them down was carrying it alone: the guarantee, the bank, the compliance, and the wages that had to be found every fortnight regardless of what the debtors did.
That is why the smart entrepreneur seeks the involvement of the exiting owner rather than simply buying them out. Fund the plant renewal they have been deferring, take the financing and the administration off their hands, and pay properly for a transition in which they stay and teach. You acquire the physical assets below replacement cost without stripping out the judgement that made them productive, and the result is a win on both sides rather than a bargain struck at someone else’s expense. These are the unanticipated synergies I look for on behalf of buyers.
It does mean something, however, for anyone reading this with the capacity to act. If you are financially positioned to acquire rather than merely to wait, this is precisely the environment in which a patient, well-informed buyer can secure genuine value, not through aggressive negotiation, but through simply being present when someone else has run out of options.
It is why my representation as a buyers agent always peaks during a recession. Also why instructions like the following are common: “We want to gain an established warehouse and distribution footprint, rather than building one from scratch. An Owner-operator willing to transition is desirable.”
The discipline required is the same discipline that governs any sound acquisition, downturn or otherwise. An initial assessment, indicative offer, properly conducted due diligence, and a clear view of what the asset, whether it is plant, a client base, or a team of skilled staff, is genuinely worth to the buying business specifically. Not really what a predator seeks – or what a distressed seller happens to be asking for. It may be argued as opportunism, which is wrong – it creates the same win-win outcomes as we seek when we are riding the crest of a wave.
Ask yourself a straightforward question. If a well-run business half your size, with a loyal client base and equipment in good order, became available tomorrow at a price reflecting the seller’s exhaustion rather than the asset’s worth, would you know how to evaluate it properly, or would you let the moment pass because assessing it felt like it was a poisoned chalice – containing something you weren’t being told.
Here is another fact – The businesses changing hands in a downturn are rarely advertised. People like me are quietly searching them out, tapping them on the shoulder – offering to talk. That’s because these businesses are simply owned by people who have reached their limit. Recognising that, and acting on it with proper diligence rather than haste, is where genuine value is found while everyone else is still deciding whether to sell.
If you are weighing an acquisition, or wondering what a business, a client list, or a set of equipment might genuinely be worth before you make an offer, I am happy to talk it through.
As a Registered Business Valuer, my assessments are prepared in accordance with the International Valuation Standards. This article is general commentary only, and is not financial, legal or professional advice specific to your circumstances.
Contact Kevin Lovewell directly on 1300 551 757.
