We have been recently doing some research into the archives of the post-Great Recession of the 2008-2010 deal market to try and understand what the near-term future may look like once the dramatic phase of COVID-19 runs its course. Of course, we would prefer not to think of those times but it’s best for buyers, sellers, and intermediaries to come to grips with the reality that the pending deal market will be more challenging than the recent past.
Harkening back to an analysis of Q2 2009 business transactions, buyers and sellers considered the following attributes of closed transactions that helped those businesses reach a deal. Focusing on these factors in 2020 will help sellers in the near to medium best understand what factors will enhance the success of their transaction getting done throughout 2020 and into 2021.
Factors That Enhanced The Chance of a Successful Transaction During the 2009 Deal Market:
Physical Assets for Debt Financing – Economic conditions at the time had made banks wary of lending. Small businesses with higher levels of tangible assets, such as capital equipment or owned real estate, fared better in securing a purchase loan.
Seller Financing – Buyers faced limited access to SBA-backed loans, as well as depleted savings and retirement accounts that had been hit hard by stock market declines. Because of this lack of access to money, sellers offering to partially finance their business sale became a crucial element to closing a deal. Seller financing could be a deciding factor for some buyers. Those who indicated they were open to seller financing received 50 to 70 percent more activity from interested buyers.
Strategic Value – Sellers in the 2009 market needed to make sure they had a focused plan for growth to attract potential buyers. Buyers were more willing to buy when they felt they could increase the value of the business. A plan for acquiring competitors or expanding a current business into a complementary product or service adds more strategic value to a potential buyer.
Revenues and Profitability that Remained Intact – Businesses that had managed to maintain their levels of revenues and profitability throughout the 2008-2009 downturn were more likely to sell. Buyers were less willing to take a risk during uncertain times, so a track record of stability and success helped in cutting down the perceived risk of completing a transaction.
Predictable and Steady Cash Flow – One of the most attractive elements for a buyer is knowing the business will make money in the future. Businesses with more reliable cash flow during the Recession – such as Computer and Software Services and Travel and Transportation Services – had better luck closing.
We will release additional research and information over the coming days and weeks related to deal-making during the last Recession. Our goal is not to be pessimistic but to be realistic based on discussions and challenges that are already beginning to surface.
Please contact us confidentially if you have any questions or comments.