By Michael Collins, Managing Principal, EquiNova
The phrase “Beauty is in the eye of the beholder” is a constant in my world, as I seek to find buyers whose eyes will be opened to the opportunity I’m presenting. Part of that search involves understanding what potential buyers are going through in this uncertain economy. Today, these potential buyers’ situations will vary markedly, and that in turn will affect how attractive they will find you.
In general, you can divide these potential buyers into several groups. Let’s examine their particular situations and how they affect you.
Private Equity Firms With Funds
P.E. firms are well-known for spending months investigating a purchase opportunity. They want a solid estimate of how much profit an acquisition is generating now and how much more profit it will make over the next five to seven years given the right investments and management. The challenge today is predicting how the U.S. economy will fare the rest of this decade. If we slip into a recession, how deep will it be? A potential minor backslide isn’t a deal-killer if the decline is expected to be short. The problem today is that companies don’t know how long current turbulence will continue. Uncertainty blurs forecasts. However, if the P.E. firm has the funds in hand, it remains likely to go ahead with a purchase when it sees a compelling opportunity.
Public Companies
Builders FirstSource and other businesses whose shares trade on the stock market set aside millions of dollars in their budgets every year to buy targets big and small. Indeed, BFS already has made two purchases this year, acquiring O.C. Cluss and Truckee-Tahoe Lumber. But that ability to buy is powered in part by the company’s share price. Home-related stocks have gyrated a lot lately, and they appear fragile in this new era of tariffs. That could prompt a more cautious attitude about buying until we get a better idea of where the economy is headed.
Buyers That Need to Borrow
The Home Depot’s purchase of SRS Distribution and QXO’s of Beacon both were made possible in part with borrowed money. But so long as lending rates remain high–first by the Federal Reserve’s tightening, and now because of sluggish Treasury bill sales–a company’s ability to borrow its way to a purchase remains challenging.
P.E. Firms Raising Capital
Expect challenges with P.E. firms, too. These operations solicit money for funding vehicles that then will be used for purchases and investments over (typically) the next five years. A private equity funding vehicle often tops $1 billion, and it can take six months to a year to raise that amount. Odds are, with investors skittish, fewer fund-raising rounds will be closed this year. That in turn means there will be fewer P.E. companies ready to buy businesses.
You
If you’re looking to sell your company, you won’t have economic tailwinds behind you. Thus, the quality and depth of your data matter even more. Buyers will want to look not just at your monthly revenues year-over-year, but also at how many units you’re moving. They will want to know whether you are winning market share. And they will want to feel secure that you’ve built a good team.
The bottom line here isn’t all that surprising: Uncertainty breeds caution. But in LBM, a good deal now is what it has always been: the kind of company that has good long-term prospects, far beyond whatever the federal government happens to be doing this month. We can help you be that kind of good deal.
