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Buying in uncertain times

A quote often used in relation to the stock market, is: “Buy on the sound of cannons, sell on the sound of trumpets.”

It means that savvy investors will buy shares when things seem the direst (when everyone is running away) – and sell when things seem the rosiest (when your Uber driver is providing stock tips). And as it applies to shares, it can also apply to buying businesses.

Some will now be wondering whether to push pause on those business ownership dreams. However here are a few reasons to keep considering this – as well as a few extra things to watch for in the current market.

Three reasons to buy now

It is the opportunity to be the master of your own destiny and not reliant on an employer. Often a major reason for buying a business is to be self-reliant.

In times of uncertainty this can be both a positive and a negative.

If you back yourself and find the right business, then potentially it can be safer to be your own boss rather than working for someone else. It might seem risky right now to leave a solid job to buy a business. However, we may soon find that for many staying put in employment comes with its own risks.

There are likely to be some good buying opportunities around soon. A smart buyer will take advantage right when the cannons are loudest.

There are likely to be vendors out there who realize they would prefer to not hang around unsold given the uncertainty and that might loosen up a few prices.

It takes guts to do it, but unless you have the opinion that things are going to stay down for years, then now (or soon) will be a great time to buy.

Staff retention is likely to get slightly easier. People are less likely to jump ship during times like this – certainty of the known outweighs any grass is greener considerations.

In recent years we’ve had a very tight labour market, so retention of key staff has often been right up there as something to watch when buying a business. If staff retention risk eases this lessens the risk on buying a business.

If you back yourself and find the right business, then potentially it can be safer to be your own boss rather than working for someone else. It might seem risky right now to leave a solid job to buy a business. However, we may soon find that for many staying put in employment comes with its own risks.

Three things to watch

Paying a price that is relevant to current profits and forecasts

One thing a recession does is it makes last years’ “record profits” a lot less alluring.
Just because the business had a great March 2020 fiscal year doesn’t mean that 2021 will look anything like it. A buyer needs to pay a price that is sustainable going forward (and for which they will be able to get finance).

Getting the right finance is key

Cashflow is going to get harder to predict. Previously reliable customers might become slow payers, given their own cash flow constraints. If you are looking to buy a business, you are going to need a more robust finance package now than you did say three months ago.

When you are in the due diligence phase, you should spend more time on things like scenario modelling where you work out how your overdraft is affected if say 10 percent fewer sales are made, margins soften five percent, and customers pay 15 percent etc. Doing your homework is key to make it through to the easier times.

Customer retention

If consumer spending starts to decline, then competition will increase (particularly on price). In my view we never really recovered from the sale addition that seemed to kick in during the GFC.

Whether ever bigger ongoing sales will have any affect on spending remains to be seen. Make sure you spend a bit more time than you would have considering the competition and what things you can do to ensure that you are not relying just on price cutting to stay in business.

Unless things are spiralling to an end of days scenario (surely the health impact is not severe enough for that) there’s no reason to hunker down and stop buying businesses.

However, the cost of getting it wrong grows in tough times. Take your time to get advice and you should buy well, get through the next period and be well placed to succeed in the recovery.

A smart buyer will be well dug in to whether the short-term cannon fire and will be the one blowing their own trumpet in years to come.

Tom Beswick
Director at Ingham Mora Chartered Accountants in Tauranga, is a business advisor who specialises in buying and selling businesses. He can be contacted on 027-5744- 019 or tom@inghammora.co.nz

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