2020-2023 Valuations
December 04, 2022
by a searcher from University of South Carolina - Darla Moore School of Business in Charleston, SC, USA
As we know, ###-###-#### had a lot of businesses get a huge bump in sales due to low interest rates and stimulus. In general, these are reflected in earnings, which seem elevated above 2020 and definitely 2018/9.
2023 is expected to have a recession and a slow down in general. Are buyers taking this into account and making lower offers based on the slowdown which is expected in the next 1-2 years?
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
The issue with PPP is that PPP and any other stimulus like the payroll tax credits, should not be used to inflate cash flow. If you are making a purchase without removing these items you are using the wrong adjusted EBITDA number. As these are one-time stimulus they should be removed from cash flow. In general, 95% of lenders are removing them from cash flow when they underwrite a deal, so if you are not removing them, you financing likely will not work.
As for values I am finally starting to see multiples come down a bit, just in the last 30 days or so. I expect they will drop a bit more in the near future as interest rates continue to climb and buyers continue to push back. In general 2021 and 2022 were recovery years for most businesses. However, if I were purchasing a business I would really focus on 2019, 2021, and 2022 and an average between these years unless there is a story or a good reason why the company has grown in 2021 and 2022 and that growth is expected to continue.
With any recession some businesses are going to be somewhat immune from the cycle. I have seen this throughout my career. If I were buying right now I would definitely be asking questions related to how the business was impacted in past downturns and be sure to understand how it might be impacted in a future downtown. I am not seeing it happening on a broad basis yet, but I am starting to see some lenders stress revenues in anticipation of an economic downturn. Business in higher impacted industries like consumer sales, hospitality, etc. are likely to be more impacted that certain core service businesses and manufacturing, but it is possible every business could feel some pinch. I would be sure you are comfortable that the price you are paying leaves room if there is a future drop in revenues, unless you are buying a business that is largely immune to recessionary impacts.
The bigger concern I think buyers need to watch for today is employment costs. Employment costs have continued to go up due to low unemployment, and that does not look to be changing in the near term. I have had several clients buy businesses recently where shortly after purchase they had to raise some salaries for key employees to be sure they could retain them. I would be sure you have budgeted some room to cover such increases in the future and that is factored into your pricing. Some seller have avoided raising payroll for an extended period of time, and some have used the pandemic as an excuse not to. You want to check and be sure the employees you are taking on are fairly compensated and have seen increases and that risk is not something being pushed onto you as the buyer.
I hope this helps. I am more than happy to talk about any specific situation you might be experiencing at any time at redacted Have a great day!
from Birla Institute of Technology and Science in Kelowna, BC, Canada