How Interest Rates Affect Business Value

In this, The Faces of Business, Andrew Cross, Co-Founder, Exit Your Way®, shares his insights on how interest rates have been affecting business value.

In this, The Faces of Business, Andrew Cross, Co-Founder, Exit Your Way®, shares his insights on how interest rates have been affecting business value.

Andrew has been helping business owners prepare and sell their businesses for over 15 years. He found his passion for helping people exit their businesses after a successful corporate career in sales and management for privately held and investor-owned companies. As Co-Founder of Exit Your Way, he has successfully helped clients increase enterprise values by over $40 million and exit many businesses.

Exit Your Way’s structured systems have helped clients achieve an average success rate of 90%+ for selling their businesses, much higher than the industry average of 25%. Their approach involves growing, preparing, and selling businesses to produce desired results for sellers.

Download our free business valuation guide here to understand more about business valuations and view our business valuation FAQs to answer the most common valuation questions.

Damon is super excited to start the show. He teases a playful comment about Andrew’s positioning, remarking on the reversed direction. The host intends to delve into the changes caused by interest rates, particularly in business sales, and the broader implications for the market and economy. He invites Andrew to share his insights, drawing parallels between the current situation and Andrew’s experiences when he began selling businesses years ago.

Andrew discloses that he entered the M&A business in 2009 during the financial crisis, which turned out to be a favorable time to join. Limited bank lending led to a slowdown in deals, with activity shifting to smaller businesses. In the past decade, access to cheap capital and near-zero interest rates created a seller’s market, resulting in higher deal multiples. However, the market dynamics have changed, and deal flow has significantly decreased.

With the government increasing interest rates to slow down the economy, Damon seeks advice for business owners considering selling their businesses during such times. He asks Andrew to share general considerations and preparations business owners should undertake regarding the value and necessary actions in this context.

Do you want to know if your business is ready for your exit or what you should do to prepare? Learn this and more with our business exit assessment here.

The Co-Founder believes business owners must understand the capital market and the rising cost of capital. He mentions that due to inflationary pressures, businesses will feel the impact of increased financing costs, including higher material and labor expenses. While businesses may continue to operate, they will face headwinds and increased costs.

When it comes to valuations, Andrew explains that assumptions are made based on market price, often driven by asset sales in which buyers aim to leverage the business’s cash flow with the cheapest available capital. He discusses various sources of capital, including friends and family, government-backed loans (such as SBA loans), venture capital, maintaining margins, and equity groups.

However, accessing affordable capital has become more challenging, and investors now seek higher returns due to alternative investment opportunities.

Get the most value for your business by understanding the process and preparing for the sale with information here on our Selling a Business page.

Damon acknowledges Andrew’s insightful point about rising interest rates making alternative investment options more attractive “because a lot of money was going into the purchase of businesses or real estate, simply because of low-interest rates.” Similarly, the host points out that the current interest rates have increased to approximately 5%, indicating a substantial shift in the financial landscape.

Damon notes the need to optimize working capital before selling a business by reducing inventory and accounts receivable and increasing accounts payable. This results in paying a higher net amount for the seller and reduces the buyer’s financial burden when funding working capital as the business expands.

Andrew points out that when selling a business without involving a bank, there is more flexibility to negotiate working capital and other terms. He suggests an efficient approach that, in the current market, it is necessary to explore alternative options such as seller financing to sell a business successfully.

The guest provides an example of how the cost of capital has changed, specifically mentioning that a typical SBA loan currently carries an interest rate of approximately nine and a half to 10%.

Andrew explains banks’ perspective when assessing a business’s value concerning the seller. He highlights the impact of rising interest rates on the business’s cash flow and how it affects the purchase price. Banks consider the cash flow to determine the debt service coverage, influencing the amount the seller can receive for their business.

With a typical loan structure of 10 years and 80% financing, the cash flow needs to cover the principal and interest payments. A bank typically expects a coverage ratio of one and a half times, making it a challenging hurdle to overcome in the current market, where interest rates are around 10%.

Damon mentions a rough calculation he recently conducted, revealing a 22% increase in the cash flow needed to support a million dollars in business value compared to the previous year.

Agreeing with Damon, the M&A guru advises that sellers must realize that assigning an arbitrary value to their business isn’t sufficient. Instead, they should consider the available cash flow for buyers to support the loan and ensure they have enough left to sustain themselves and gradually pay off the loan. Building equity in a reasonable timeframe is crucial, typically within three to five years. If the business lacks sufficient cash flow, adjustments may be necessary.

Damon raises an additional point regarding the impact of rising interest rates on the need for growth capital. He suggests that the increased interest rates can add to the cost of funding the required growth, further affecting business owners.

Andrew acknowledges that sellers often overlook the need for sufficient working capital to be provided to the buyer. While the selling price may be set at a certain amount, the buyer will expect working capital to be included, which could amount to around $200,000 for a million-dollar transaction.

The M&A giant maintains that despite a high selling price, including necessary working capital may reduce the final amount received by the seller, such as receiving $800,000 instead of the initially expected $1 million.

Damon raises an important question about the impact of rising interest costs on investment owners and their future returns. Andrew discusses buyer preferences in the current market. Some prioritize steady returns, while others seek high-growth companies. A sustainable EBITDA margin and a solid transition plan are critical in attracting buyers. Buyers consider industry performance, sales stability, pricing strategies, and talent retention. The desirability of a business depends on its industry.

Damon raises another question about the future outlook for business sales. He asks for insights on what individuals planning to sell their businesses should be prepared for in the coming six months.

Andrew answers that although there has been a pullback in the market, there is still a strong appetite for purchasing businesses. He advises sellers to adjust their expectations and obtain a proper valuation to understand their current position. Similarly, timing is crucial in selling a business, and it is essential to seize the opportunity when there is a favorable return on investment, regardless of predetermined timelines.

Damon asks Andrew about transferring equipment loans when selling a manufacturing business. Andrew responds while commercial leases are generally not transferable, the transferability of equipment loans depends on the contract. Andrew agrees that it could be a valuable consideration and appreciates the point raised by Damon.

Damon shows interest in learning about the possibility of business owners retaining ownership of machines and leasing them back to the new buyer at a lower rate.

The guest suggests leasing machines back to the buyer at a lower rate as a potential strategy. He also mentions the value of favorable real estate leases. However, contract provisions related to change of control should be considered.

Damon suggests exploring the option of reducing interest costs on equipment for both the seller and the buyer.

Andrew says that navigating an exit strategy during uncertain times can be challenging. Drawing from the lessons of the 2009 recession, he advises against waiting it out as it may lead to a loss of equity and a diminished business. Time is a crucial factor to consider, as delaying the decision to sell means being older when eventually exiting the business.

Damon wishes to know Andrew’s perspective on whether the rising interest rates filter out potential buyers for businesses, resulting in increased competition for the best businesses.

Andrew believes rising interest rates lead to a cleansing effect across industries, particularly in the hospitality, restaurant, and service sectors. Many businesses in these industries are forced to close, but new ones will emerge as capital is invested.

Damon and Andrew hope to witness “interesting times ahead.”

Toward the conclusion of the Livestream, Andrew maintains that the current interest rate increase is a correction rather than a return to zero interest rates. He again parallels the 2009 crash, emphasizing the need for a realistic perspective and a return to a more sustainable business environment. Despite the adjustment, value, and transactions are still taking place, indicating an ongoing market where buyers are interested in genuine business opportunities.

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ABOUT EXIT YOUR WAY®

Exit Your Way® provides a structured process and skilled resources to grow business value and allow business owners to leave with 2X+ more money when they are ready.

You can find more information about the Exit Your Way® process and our team on our website.

You can contact us by phone:  822-BIZ-EXIT (249-3948)   Or by Email:  info@exityourway.us

Find us on LinkedIn:  Damon PistulkaAndrew Cross

Find our Companies on LinkedIn: Exit Your Way®,  Cross Northwest Mergers & Acquisitions, Bowman digital Media 

Follow Us on Twitter: @dpistulka  @exityourway

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Service Professionals Network:  Damon PistulkaAndrew Cross

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Other websites to check out:  Cross Northwest Mergers & AcquisitionsDamon PistulkaIra BowmanService Professionals Network (SPN)Fangled TechnologiesB2B TailDenver Consulting FirmWarren ResearchStellar Insight, Now CFO, Excel Management Systems  & Project Help You Grow

34:29

SUMMARY KEYWORDS

business, capital, deals, buyer, interest rates, margins, working, high, sale, returns, years, seller, cost, market, cash flow, growth, increase, equity, valuations, paying

SPEAKERS

Andrew Cross, Damon Pistulka

 

Damon Pistulka  00:00

All right, everyone, welcome once again, the faces of business. I’m your host, Damon Pistulka. And with me today, I have that guy right over there. Andrew Krause, Andrew, glad to have you today. Backwards, isn’t it? It’s like I was going to point at with stupid. That’s about it, isn’t it? out yet?

Well, today we got an interesting topic, because we’re going to be talking about how interest rates affect business value, we’re going to cover that a bit, we’re going to cover some of the some of the changes. It’s really made in the business sale, the sale the selling of businesses, and and some of the things we’re seeing in the market and the economy because of it.

So, Andrew, let’s get started. Yeah. So when you started out selling businesses a few years ago, this was not in such a good time. And you you had some similar situations to what we’re starting to experience now. So talk about that, because then I think that’ll roll is good into what we’re seeing with such a dramatic for the last decade or so rising interest rates.

 

Andrew Cross  01:19

Yeah, yeah, I got into the m&a business in 2009. And spent the first year getting my knowledge, which is good, because I didn’t know what I didn’t know. And, and a lot of people weren’t getting out of the m&a business. At that time, as you know, that was the big financial crisis.

And it was, you know, it was a disaster. I think, you know, retrospect, it turned out and I didn’t do an on purpose turned out to be a good time to get into the business. But at that time, there was no real any bank lending, everything had frozen up the bank failures, and all that kind of stuff. So deals really slowed up private equity was still fairly active and wanting to be active.

But you know, even by private equity groups and investors, they still leverage businesses and use US business loans. So you know, that time in order to get any deals done, and the activity sort of went down to smaller deals, and I, and if you’re going into smaller businesses where you know, you have more flexibility, AIDS, they’re not as quite as expensive, you can also do, you know, you can, you can, you’re free to do more creative financing strategies, seller financing, and earnouts.

And these kinds of things that, that helped. But at that time to a lot of the medium size or larger businesses just bunkered in, and just wanted to wait it out, not gonna sell and so there was activity was way down. So looking ahead to today, you know, I mean, that, and since then we’ve had 10 years of cheap, cat, you know, cheap capital, and, you know, interest rates have been at zero. You know, the government’s been flooding money into the market during COVID crisis and stuff like that.

And, you know, for the most part, you know, that it’s unprecedented that we’ve buyers have had that kind of access to capital for the last almost 10 years. It’s been, you know, a seller’s market. You know, it’s like, you know, you there’s a lot of dry powder out there from the equity groups to handle access to cheap capital. And, you know, and they were they couldn’t even spend what the hat you know, and then what the net result was higher multiples. Yeah. And here we are today, now, very, very quickly, that the whole tables completely flipped. And we definitely are seeing the effect deal. Flow has gone down.

 

Damon Pistulka  04:04

Yes. Yeah, it has, it really has in the first, the first half the year, I haven’t looked at the latest statistics, but I know that every every article I’ve read, they say it’s down, it’s down, it’s down. And it’s getting buyers are getting much more selective. And in some of the other things, we’ll discuss a minute that in valuation as has been affected, and we’ll talk about that. And then also terms Terms of the deal and how they’re structuring the terms of deals has been affected. So when, when the interest is increased, you know, the government’s doing this to try to slow down the economy.

What are what are some of the things that that business owners really need to be thinking about if they’re considering the sale of the business in a time of interest? rate increase mean what? What are the things that they’re going to have to come to the realization or think about when, in terms of value in terms of what they should be doing to prepare? So give me a couple general things, and then we’ll go into some more specific?

 

Andrew Cross  05:18

Well, I think, you know, I’m in business owners need to understand the capital market, and the cost of capital. And, you know, this is that that’s gone way up, though. So, it, you know, they’re gonna feel that too, because, you know, in being able to finance their business cost of materials is going up, cost of labor is going up, you know, so that we are under inflationary pressures. You know, it does seem that businesses are still chugging along, and I think, you know, they’re, obviously they’re gonna have, they’re gonna be participating in the inflation with increased costs.

And so sales will, will probably increase and that affect whether margins do or not, you know, it’s, you know, we have to be seen, but it’s definitely they’ve got headwinds that they’re facing, but the cost of capital, at the end of the day, you know, they just have to understand, we just make some assumptions, when you’re doing valuations, you make assumptions, that the way the, the business will be valued based on market price, the market price is driven by, you know, generally a buyer, you know, will do an asset sale.

And, you know, it’s not always the case, but you know, you can make a pretty good assumptions and valuators do that it’s going to be an asset sale, and the buyer is going to come in to leverage the business cash flow to buy the business with the cheapest amount of capital they can and the cheapest capital, of course, his friends and family. Yeah, yeah. And then some people do that. Again, that’s where it’s, it’s that flexibility, you get on a smaller deal.

And then next cheapest form of capital is, you know, government back loans, SBA loans, which have now gotten increasingly more expensive. And then, and then cost of capital. Beyond that, you’re going up into venture capital, equity groups, investors, you know, who you expect fairly high rates of return on their, their investments in there. So, and they they also leverage with the bank, so they’re, they’re there, they don’t have the access that they used to.

And these are investors looking for our alternative returns. So an equity group, you know, you know, we’ll have investors who put money into that, and they can, they can access that cash. But, you know, they are going to want to see higher returns, because then that today, they can go take that same amount of money, that they’re investing in these small, medium businesses and private equity, and put it in just into T bills and make 7% that’s the safest thing you can do. You know, so, you know,

 

Damon Pistulka  08:02

there’s, you’re gonna have other options.

 

Andrew Cross  08:04

Yeah, they definitely have other options. And so, you know, they’re, because that’s all they are investors.

 

Damon Pistulka  08:12

That’s it. That’s a good point. Because that one of the things that I didn’t think about until you said that was really that the rising interest rates make other options outside of investing in businesses more attractive, because a lot of money was going into the purchase of businesses or real estate, simply because low interest rates. And in in those things, the values of those are appreciating so fast, because of the lower interest rates, was driving a lot of investment into businesses and real estate.

 

Andrew Cross  08:45

Yep. So I mean, it’s definitely it at the end of the day to get a deal that it will have an effect on purchase price. Yeah, prices are gonna have to come down, because the cost of buying a business has gone up. Yeah. So you know, the business owner, that’s, you know, what they need to recognize that in order to kind of get the, you know, what the return they want on their investment, they may have to, they may have to work on internal organic growth and mechanisms to to get past that because multiples are dropping.

 

Damon Pistulka  09:24

Yeah, that’s true. Because if you just look at last year, and I don’t quote me on the numbers, because I did this a while ago, but what weren’t the interest rates like this time last year, a year ago, like a half a percent or something like that, and now I don’t even know what it is 5% 5% 5% score,

 

Andrew Cross  09:41

for example, a typical SBA loan now is running about nine and a half to 10%. Okay, and it was it for the last nine years or seven years. It’s been around five and six.

 

Damon Pistulka  09:55

Yeah, so five to six. So what does that

 

Andrew Cross  09:59

mean? You know, to the seller, you know, it’s just look at it from the bank’s perspective, okay, I want to buy this business, the bank is going to underwrite it, you’re gonna look at, you’re gonna look at your cash flow, you know, and if you had, you know, a billion dollars in cash flow, okay? That you’re not going to get as much for that as you did in the past, because that cash flow has to pay that debt service. And so it’s it’s pretty good math to figure out, you know, typical loan is 10 years, you know, amortized, you know, 80% down, are going to finance 80%, probably 20% cash down, that’s a very typical asset sale deal.

But banks will finance and so, you know, if you do take your purchase price, and you can figure out what’s your annual, you know, expense, your principal plus interest payments are going to be, you know, you have to have enough cash flow to cover that. Yeah. And, yeah, that’s so, you know, in order to get that coverage, you know, one and a half times coverage is, you know, what a bank, a typical bank is going to want to see, you gotta have enough cash flow to cover that. And that’s so it’s a lot, it’s a pretty high hurdle to get over now, when it’s at 10%.

 

Damon Pistulka  11:25

Yeah, when I wasn’t quite this high, when I did a rough calculation, I don’t know, two, three months ago. And it was something like, it went from on per million dollars of business price. And I was kind of going okay, on using one and a half debt service coverage ratio, how much cash flow? Do I need to support $1 million in business value?

And it’s just rough as heck, right? But it was it like, from last year, one year ago to then it was 22% difference? I think. So if each million was if I remember, right, it was like 180,000. And now it’s like 215 220,000, that it needs to support $1 million in value. So I mean, this is significant for, for, for business owners, that were expecting that their business was going to sell in a time of low interest, because they just dropped the price of their business. Buy that much. Right?

 

Andrew Cross  12:27

Yep, absolutely. I mean, if that, if that’s what the market will bear, right and off the capital has an effect on that. Yeah, I mean, so that’s, it’s where buyers, you know, sellers really need to understand just that, you know, it isn’t, I’m going to sell you this car.

And we can put some arbitrary value on it, you know, it really comes down to it, you know, step back and, and, and look at the current amount of cash flow, the buyer will have available to support a the lending den, and they have to, you know, they gotta have enough left at the end of the day to pay themselves and, and pay down their, their loan, so that they’re building equity, you know, in a reasonable amount of time, which is typically, you know, it should be at least three to five years, you should have supported building that equity. But if you don’t have enough to do it, you just,

 

Damon Pistulka  13:25

yeah, and one of the things I was just thinking to, and helped me with this. So if I’m looking at this, and I know, when they’re figuring loans, they look at how much growth capital you need, as well. And if you need a bit of growth capital to do this to the increase in interest rates, I’ve hurt you there too, because it’s, it’s going to take you you know, it’s going to cost you more interest on all the growth that you need to fund.

 

Andrew Cross  13:52

Yeah. Well, you know, and that’s, you know, working capital that is going to be required after the transaction, the you know, and the working capital, you need to have on hand to run the business, you know, that will go, you know, that’ll take you that’s not that hasn’t changed, but you’re, you’re, you’re correct, you’re gonna have to provide that the business the seller will have to provide that to the buyer, enough working capital kept in the business. So that means current assets, you know, anything you can turn to cash in the next you know, 90 days.

Yeah, to keep the business running. Vietnam sellers miss that, you know, I’m gonna get a million for my business, just for example, oh, but, you know, the equity in the businesses, the cash you have in it too, and the receivables and all that kind of stuff. So yeah, the selling price might be a million bucks, but Well, the buyer is not going to buy your cash, but they are gonna want working capital in there and it could be $200,000 You know, on a million dollar transaction. Yeah, you know,

 

Damon Pistulka  14:55

so you know, it makes a difference.

 

Andrew Cross  14:58

It makes a difference in in No, and really, at the end of the day, it’s cash that you’re leaving in the business is working capital. So you can say, maybe I’m not getting a million, I’m getting 800,000, it’s really about what you your net. After all these things are done, of course, that’s,

 

Damon Pistulka  15:14

that’s a, that’s a good money, that’s a good money, that’s a good point. Because that money, if you’re optimizing your working capital and driving down prior to the sale, that actually helps you net more out when you go to sell the business.

So if you can reduce your inventory levels and still be growing and running the business the same way, if you can reduce your AR and and increase your AP a little bit to really reduce the total amount of capital in the business, that will help you net more for the from the sale, and it will reduce the buyers just their their I guess risk, because they would have to fund more working capital in the future, not necessarily the initial part that you have to but as they grow, the working capital is more expensive per dollar they’ve got to put into it. So

 

Andrew Cross  16:10

yeah, that’s correct. You know, it again, when you go into smaller deals, you know, this is this is one of the areas where a seller can have some flexibility a bank is, is going to probably require the seller to provide working capital, but also, because they’re conservative, they’re going to require the buyer to have a line of credit. Again, which is going to be quite a bit, at least a revolving line of credit to because they want to be over covered as far as working capital goes. And those revolving lines are pretty expensive now, too. So

 

Damon Pistulka  16:45

yeah, so it’s a revolving line costs too.

 

Andrew Cross  16:48

But you know, if you’re doing if you do a sale without a bank, you know, you don’t you can, you can negotiate the working capital and that kind of stuff. And, you know, in that, like you said, and prepare for that transition, or you don’t have to, that’s that flexibility that for you.

You know, I think the biggest differences nowadays now today, and this has really happened in the last six, seven months. If you want to sell your business, you you’re gonna have to look at these kind of working around the bank, doing more of your own seller financing, creating your own, you know, providing capital, and that kind of stuff, just not only to get a little bit more money, but also to get the deal done.

 

Damon Pistulka  17:32

So the one of the things that that really, as you’re bringing this up earlier, was the interest, the interest cost or cutting, you know, actually reducing future returns for investment owners. So do How much is that hurting? I mean, because I know, it’s sophisticated investment buyers, they’re looking at future earnings, because they know they’ve got to grow the value of the business. And you know, that’s how they make their total return, right? I’m gonna buy it right today.

But that growth and getting it out there and increasing that value, like you want is really where they’re, they’re, they make sometimes the lion’s share of their money. So do you think that this is pressuring business sellers to have a higher growth rate during this time, just to to, I mean, get deals done, because the private equity people or people that are sophisticated investment buyers, they’re getting more picky about deals, just because if flirtation or the interest rates are continuing to go up, it’s going to just cut their returns back even further?

 

Andrew Cross  18:48

Yeah, well, I think that, that probably depends. I mean, and also, you know, in this climate to, you know, high growth can be expensive. So you gotta find that’s true, you know, so you’re gonna get more working capital. And there are, you know, all buyers are different, you know, some, there’s some, they’re more conservative funds that really just want good steady returns. They’re not really interested in high growth companies, and there are others that are looking for high growth companies, because they have vehicles to have financing to be able to support that growth.

Yeah, and get returns, but it’s not always the core of their strategy to have a company that’s growing. But, you know, it’s really all about the EBITDA. The margin, was some, you know, and in, you’ve got to, you know, they’ve got to show that it’s repeatable, you trans that you can transition it and you have been historically been meeting those margins and margins. You know, and can continue to do that into the future. That’s, I think that’s going to be the most that’s going to be the most sought after businesses right now to

 

Damon Pistulka  20:02

Yeah, I need to sell. That’s a good point, because I was I was just writing a note, as you said, that is, I would think that if a business is able to maintain or increase their margins as a percent of revenue in it in the same time now that we’re seeing increases in interest rates, that has to be a big benefit for him, you know,

 

Andrew Cross  20:26

you know, of course, it depends on the business too. And you just want to, you know, you, the buyers are pretty savvy out there, they know what the competitors are doing, they want to see, you know, are you are you above average, you know, on your margins are below. That’s true, can you, you know, and can you navigate through these headwinds in the economy?

Can you raise your prices and still keep your sales level up? Can you, you know, cube can you still keep delivering those margins and pay your, you know, increase, keep your, your management team or your people in place, because you’re going to be paying them more and everything. So then in the buyers are going to be looking for? You know, that’s that’s, you know, one thing too, it really depends on what industry you’re in. Yeah,

 

Damon Pistulka  21:11

that’s true, that’d be true, because they’re going

 

Andrew Cross  21:13

to be looking for some investments that are, you know, probably it’s going to be more looking for safe harbors.

 

Damon Pistulka  21:22

Yeah. Well, you think about that, and you go things like manufacturing, where we play a fair amount. Manufacturing, that’s capital intensive, like, you know, sophisticated aerospace machinery or something like that, where you’re dumping a million plus dollars into each machine that you bring in that kind of stuff that has to really hamper the sale of those businesses. No.

 

Andrew Cross  21:45

Yeah, it does. And it’s expensive, those, there’s high barriers to get in those types of businesses. Yeah. You know, investors may be looking for boring businesses, insurance, services, or health care, you know, we don’t see. You know, I think there’s a fair bit of activity in there as well, but okay,

 

Damon Pistulka  22:09

So what are you thinking we’re gonna see six months out from now? Do you think we’re going to? I mean, what should What should people that are contemplating the sale of their business be really preparing themselves for?

 

Andrew Cross  22:28

You know, I, you know, there is it, this isn’t, it’s not really a recession, there is a pullback, but there is still a big appetite, to purchase businesses, but the right kind of businesses, so I think, you know, basically, adjust your expectations, know what you’re going to, you know, and look ahead to see what you can get, get a good evaluation done, you know, from, you know, somebody like that, so you know, where you’re at. And then you can set up a way to target, you know, kind of where you want to exit, it’s not going to be as much as you think. But, you know, and that’s, that’s one of the big things in the sale of businesses is timing.

Yeah, you know, timing is everything. And you know, it’s not you. The one thing you really aren’t in control of to say, I would like to sell my business when I’m 60 Yeah, you’re doing that? It’s because you have no idea what it’s going to be like that. Yeah, sell it, you know, when when you get a, you get a good return on your investment. And if that means now or late sooner than later than flying?

 

Damon Pistulka  23:46

I got one question because I was thinking about this as as we had some conversations today with with some business owners. So if I have a we were talking about creative deal financing, right, we really have to figure out some creative ways to finance deals. Have you seen it before?

We’re someone would say I’ve got a manufacturing business and I’ve got equipment, I’ve got equipment loans. Have you ever seen it? Where if my equipment loans today, if I got my equipment two years ago, and I got a five year loan on my equipment, I got it at a good interest rate. Right. Have you seen it where rather than pay that that loan off that the the the somehow transferred the I don’t know?

 

Andrew Cross  24:36

Dude, that’s a really good question. And, you know, because there may be some equity. Yeah, but I think, you know, commercial leases and those kinds of things. Yeah. Is it’s just like in your home. People aren’t selling right now because they, they’re sitting on you know, they got a 2% interest rate, you know, eight or nine, so they’re not selling it Whether it’s you know, those are not transferable, whether they are depends on the contract. Yeah, if it is, you know, alright. If it is there’s, you know, I be something that, you know, you bring a good point, you may have something of value there.

 

Damon Pistulka  25:14

Yeah, exactly. That’s what I’m thinking. Because if you if you have machines with excess capacity or something, and I’ve got commercial leases with those, is it good for some owners to retain ownership of machines and lease them back at the rate that they could to the, to the new buyer, because my lease costs are lower for the new buyer?

 

Andrew Cross  25:36

That’s probably a that’s yeah, that would be a good way to look at that, you know, and in a similar way, similar fashion, that that’s how leases are dealt with, too. So I mean, if you, you know, if you’re in real estate lease, if you’re sitting on, you know, a very good competitive rate, and you’ve had it and you’ve got an option for another five years or something, there’s could be value to that. But again, you know, landlords are pretty savvy, and yeah, usually their contracts are written if there’s a change of control. Yeah, yeah. Yeah. But,

 

Damon Pistulka  26:07

you know, it’s worth looking at equipment, though. I mean, if you if you got a lot of equipment, and and you’re, you’re locked in with a good rate, it might be something that’s well worth it, to figure out a way to reduce interest costs for you and the buyer. Yeah. Yeah, I don’t know, just came up as we were talking about it here. So it’s, it’s taking a lot more thought into getting deals done when the financing costs are higher, isn’t it?

 

Andrew Cross  26:34

Exactly right. Yeah.

 

Damon Pistulka  26:39

So what what exciting things? Do you think the answer is race that caused in the business sales?

 

Andrew Cross  26:47

Good things,

 

Damon Pistulka  26:48

good things, exciting things? Things that go holy heck, this is awesome. I think

 

Andrew Cross  26:52

it’s exciting to be in the finance business. Yeah, you know, and, you know, those those services are, are still doing pretty well, I’m, I’m quite surprised how, you know, how resilient the market has been, if they’re buying healthy down, but you know, paying the they’re overcoming or paying the interest rates, anyways, deals are getting done.

So I think generally, I think, especially in the small, medium businesses that, you know, I think the, I think the economy is pretty good, you know, for that, you know, certainly the demand there, and, you know, but, you know, it is definitely more technical and difficult to navigate around an exit if if you’re coming to that point, you know, it, it’s, you know, my experience was from 2009 Was that business owners bunkered in and waited it out.

And that wasn’t really that, you know, that a lot of them ended up, you know, just get they just lost equity in the business. And they got, you know, they went through a decline to you know, this gentleman. Yeah. And, yeah, you know, it’s, it’s, you know, I think bunkering in and waiting. You know, it might work. But you know, you could still at the end of the day, you may have much less of a business to sell. But it’s the other side, and you’ll be a few years older, too.

 

Damon Pistulka  28:27

Yeah. Well, the one thing that I’m wondering is, is is the increase in interest rates, weeding out a lot of the businesses that were probably getting considered before but can’t be considered now. So do you think the best businesses have have more competition to buy them?

 

Andrew Cross  28:46

Yeah, I think they’ll there’ll be some cleansing. You know, throughout and I think that’s across industries, not even to more. Yeah, I think like the, the, probably the most you can see it, right. It’s in the hospitality, restaurant. service industry. It’s, there was a lot me COVID. You know, they kept a lot of people around, but the interest rates are flushing out a lot of them and a lot of closures, and then, you know, those kind of industries, that’s what they do. They’ll pop back up, and then you know, and how do they pop back up and people are putting capital into it?

 

Damon Pistulka  29:21

Yeah, yeah. It’s interesting times for sure.

 

Andrew Cross  29:24

You know, I think a target in that too, is it one of the biggest expenses that any business has is the real estate, and real estate prices have been, you know, you, if you have a business, it’s, you know, God is paying 20 or 30% of their revenue towards their rent, you know, and that’s what was going on.

And it’s because rent rent, you know, real estate’s high, it’s not, you know, the business generate what it generates, but, you know, no business should be spending, you know, that much of their revenue towards their rent. So there’s an adjustment there and that’ll be good and there’s opportunities that come up. Yeah. In that real estate market. doesn’t need to adjust?

 

Damon Pistulka  30:01

Yeah, yeah. Because as as you know, you looked at some businesses in the last 12 months that were paying far above, you know, as a percentage, it was normal and for their area for the type of space that they have, but it was significantly higher than what they should as a percent of revenue. Based on historical

 

Andrew Cross  30:22

Yeah. Yeah. You know, that goes the business the the, you know, the business is actually paying for the landlord’s. Yeah. This isn’t making anything. Yeah. That’s that’s, that’s in small businesses. That’s pretty common. But yeah.

 

Damon Pistulka  30:45

Well, if you’re the owner of the business and the real estate, that’s, that’s not such a bad thing. But when you’re listening to somebody else,

 

Andrew Cross  30:52

but it’ll be interesting. I mean, there’s office vacancies, and you know, that kind of stuff and remote work. And there’s a lot of pressures. And I think that I think in the long run, not good for real estate people, but better for the overall economy and businesses. Yeah, more affordable. Real estate.

 

Damon Pistulka  31:11

So it seems like from our discussion today, one of the things though that business, anyone considering a sale of business should really do is a probably want to, if you’re got a valuation last year, you need to get that thing updated, at least because it’s going to change. And the second thing is is is that if you’re not growing at least a bit, you might want to look at that and see if you can change that a little bit, because that will help the buyer get more comfort in overcoming any future interest

 

Andrew Cross  31:47

rate. Yeah. I’ll definitely caveat that with growth, profitable growth,

 

Damon Pistulka  31:52

profitable growth. There you go. There you go.

 

Andrew Cross  31:54

You got your margins, you know,

 

Damon Pistulka  31:56

yeah, that’s right. There you go. That’s probably the biggest thing is maintain your margins with some growth, and you’re probably going to be in the best situation. Yeah. Well, Andrew, it’s was great talking about this, because this has been on on the minds of many people in the industry of selling businesses, for sure. It’s if people listening didn’t understand, if they saw all the blog posts and everything that are happening about it, they would realize that this is changing a lot of things for business owners, I want to exit

 

Andrew Cross  32:27

it is. And and I, I do think you know, it’s it’s a correction, and I did, I don’t think we’re gonna be going back to zero interest days. So it’s really, and that was an adjustment back in 2009, that people had to realize it before that crash. You know, everybody was into doing deals and wheeling dealing, and they thought it would never end. It’s really just getting back to baseline. Yeah. You know, it’s still there’s still value, you’re still transactions going, there’s still a market and buyers want to buy or get getting back more into like the real, you know, you know, what transactions should be for?

 

Damon Pistulka  33:08

That’s a good point. That’s a good point. Because valuations were high, because money was so cheap, and people were tempted to buy less quality businesses, because valuations are cheap. And they could stick you know, money into it. And yeah, and maybe do some fixer upper kind of things, where now they’re going to be looking at and going, hmm, we don’t want to spend that extra money if you know, we’re not going to go down that world. Yeah,

 

Andrew Cross  33:33

these are I mean, I think auto industry is having similar trouble. They got new cars that are sitting out there because people can’t you know, they’re they need to they need to bring their prices down their costs. So but that’s let’s see how it goes. Say Yeah, well different than with a business. Yeah.

 

Damon Pistulka  33:51

Well, thanks for stopping by today, Andrew. And I know people can people can get a hold of you at the exit your way website and talk to you there and or you it’s Andrew at exit your way.com if they got questions about this, but thanks for stopping by and talking today. You bet. Talk to you later, everyone and everyone today. Thanks for listening. Thanks for always getting in here putting comments in and doing the doing that and helping support us. And if you got someone that you think you’d like to have on the faces of business haven’t reached out to me. Thanks, everyone. Bye

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