InSight

Exit and Growth Strategies for Middle Market Businesses

2009 — Year of Opportunity for Smart Business Owners

By Kim Levin | Jan 16, 2009

As of January 2009, many banks and non-bank lenders are caught in a ‘liquidity trap’ where they must fix their own balance sheets before they can resume lending to customers. Getting buyout financing is harder than ever and new loans are secured by both cash flow and hard assets. On Wall Street, there’s a big slowdown in mergers & acquisitions.

Wall Street’s train wreck is Main Street’s opportunity.  Smart business owners and their advisors will certainly use these changes to their advantage.  Here are some ideas for owners considering a capital transaction in 2009:

  1. Cash is king. Instead of an illiquid investment in a private company, this is probably a good year to have cash.  Consider a buyout or recap if you have another use for money. There are many opportunities in financial investments and real estate, for example.
  2. Debt is cheap. For borrowers that qualify, interest rates are as low as they have been in a lifetime.  If you have good credit and debt-free assets, consider recapitalizing with low-cost debt.  Ask for an estimate of your secured debt capacity.
  3. Taxes are low. Regardless of your political persuasion, it looks like taxes will go up – maybe as early as this year. We certainly don’t know the outcome, but if the tax on gains goes back to the old rate, then a deal now is worth 18% more than a deal later.  After taxes, you could keep more today than you might get by waiting for a better market someday.
  4. Owner financing is back. Owner financing was risky back in the days of over-leveraged buyouts.  In today’s under-leveraged buyouts, the owner can take the place of last year’s bank loan.  Instead of getting taxable cash and then buying an annuity, a tax-deferred note can more than double your retirement income.
  5. Value is relative.  Even in a down market, there are always investors looking to invest in good companies. These well-capitalized buyers do deals in good times and bad. If your business is flat when everyone else is down, you might be the most attractive company in your industry.
  6. Get paid twice. Don’t sell it all when the market is down.  Sell up to 80% and keep the rest.  As the business grows and pays down debt, the part you keep can be worth as much as the part you sell. Ask an advisor about this ‘second bite of the apple’ transaction.

In summary, there’s no such thing as a bad time to do good business. Now more than ever, it’s important to talk with an experienced firm – one that has done many transactions in both good and bad times.  Consult your advisor to discuss these and other ideas for a successful capital transaction in 2009.



2 Responses to “2009 — Year of Opportunity for Smart Business Owners”

  1. Corporate buyers with access to cash receive far better returns on their acquisition dollars during recessions. Troubled deals that would be done in good times are being liquidated, mundane companies are finding it hard to get a fair multiple, and cash is at a premium. 

  2. Larry, you make great points here. The savvy entreprenuer will take advantage of this once in a century opportunity.

    Best to all those that take up your sage advice.

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