Hello Freinds!
If you’re worried about how to close deals in a recession, fear not and read on!
How To Close Deals In A Recession
There are pros and cons when it comes to closing deals in a recession and in the current economic climate, to be more exact.
The main benefit for business buyers is that sellers are scared and more motivated to sell. But on the other hand, higher interest rates mean that companies need to have a higher net profit to support debt and have a healthy debt coverage service ratio (DSCR) for leveraged buyouts (LBOs).
Calculating DSCR
Here is how to calculate the DSCR to see if a company can support debt.
A DSCR under 1.5 is a red flag, and 3 + is a smoking hot deal.
Loan amount: $240,000.00
Loan term: 10 years
Fixed Interest: 6.062%
First, Google search for "mortgage calculator" and scroll past the first ad(s).
Enter the total loan amount of $240,000.00.
Enter the loan term; an example SBA loan would be 10 years.
Enter the interest rate of 6.062%.
On the right, you'll see your monthly debt service of $1,449.00. So, the target company's free cash flow (net profit) should be at least 1.5 times $1,449.00 or $2,173.50 ($2,173.50/$1,449.00 = 1.5), but a 1.5x DSCR would only leave $724.50 to run the business. An even better 2x DSCR would be 2 x $1,449.00 = 2,898.00 in monthly free cash flow.
The DSCR equation = (free cashflow) / (monthly debt service) = DSCR.
So, if the example company had $10,000.00 in monthly free cash flow, you would calculate: $10,000.00 / $1,449.00 = 6.901 DSCR. This means the company can support the monthly debt service 6.9 times per month.
All this means is that if interest rates are double what they used to be, your deals have to be twice as good.
Creative Deal Making
On the other hand, if you have other assets, you can leverage them for cheaper money examples would include government bonds, employee retention credits, and insurance policy loans.
You can also push for high levels of seller financing with enticing earn-outs that include ballooning profit interests, and equity for the seller in the newco.
Asset Heavy Deals
With the market contracting asset heavy deals are getting funded much more quickly right now.
Here is the list of industries that aren't slowing down:
Assisted Living
Hospice
Commercial Cleaning
Auto Shop
Construction
Real Estate
Real Estate Development
Health Care
Oil & Gas
Clean Energy
Manufacturing
Yachts
Exotic Cars
Watches
Art
Unreplicatble Collectibles
Remember that accountants run the world, and they need collateral that they can see and touch!
And everyone can win when rates are low; it’s the truly disciplined entrepreneurs that succeed when rates are high.
Hopefully, you found some value in this short article, and keep an eye out for the next one.
Source:
https://acquisitionaficionado.com/latest-issue/how-to-close-deals-in-a-recession/
Post Of The Week
We put a man on the moon 53 years ago!
And luckily for you, closing deals isn't rocket science, and it can be systemized!
If you need help setting yourself up with leverage or closing deals, ASE has dedicated professionals for each bullet point.
Deals Of The Week
Here are all of our off-market companies for sale and a list of vetted business buyers:
https://docs.google.com/document/d/1wU2ZctV_KZnNDPpS_NNpLNp2nhNMLxOn5YbVZIwlyQU/edit?usp=sharing
Best viewed on PC for a clickable table of contents on the left.
And bookmark the link. It's a live Rolodex!
Financial Architecting Tip Of The Week
The ASE Fleet's Financial Architecting Tool #5
ERC - Coronavirus (COVID-19) Economic Relief Legislation
Has your business been impacted by COVID but still supporting your employees? You could be eligible for a refundable retention credit of up to $26,000 per employee.
The CARES Act was signed into law on March 27, 2020, to address the negative economic impact of the COVID-19 pandemic. Within the CARES Act, Congress created the Employee Retention Credit (“ERC”), a fully refundable payroll tax credit, to provide aid to employers impacted by the COVID-19 pandemic.
ASE has an experienced partner ready to file your ERC application!
Deal Trophy Of The Week
Business Buyer Of The Week
🤩 Our partner is seeking a West Pennsylvania Manufacturing company. With 1-7M in Top-line Revenue, with a Motivated Seller w/ >40% cash down. > 15 years old.