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By: Leah M. Berend, CPA
The uncertain times we find ourselves in have pushed entrepreneurs to reevaluate their long-term plans. Even as the full effect of interest rate hikes are yet to be felt, layoffs and a general tightening in the market is already occurring. In today’s volatile economic landscape, while the decision to sell can vary greatly depending on the industry, size of the business, and individual circumstances, business owners are still pursuing the sale of their companies. Private equity firms are bearing a higher cost of capital, but they still have money to deploy and the competition still exists for great investments. Multiples are still healthy though nearer to 2019 levels rather than the peaks of 2021.
A motivation for business owners to contemplate selling their enterprises during periods of high inflation lies mostly with the typical reasons business owners need to sell their companies like retirement, etc. According to the Exit Planning Institute, the majority of small to mid-size business owners have 70-80% of their net worth tied up in their company and their prospect for retirement is living off the interest generated by investing the sale proceeds. High inflation typically aligns with elevated interest rates, rendering traditional, low-risk investments more appealing. By divesting their businesses and channeling the funds into investments, business owners can cultivate a steady stream of income from the accrued interest.
This approach holds appeal for business owners approaching retirement or those contemplating a transition into new ventures. Instead of grappling with the uncertainties of managing a business amid an irrational market, they can bask in financial security by relying on the most conservative avenues to get returns from investments in instruments like Certificates of Deposit (CDs), Bonds, and Treasury-protected securities.
For businesses heavily reliant on commodities or raw materials subject to price volatility, inflation’s impact can prove even more pronounced. Escalating input costs can compress profit margins, exacerbating the challenge of sustaining profitability. In such scenarios, business owners may perceive selling as a prudent strategy to lock in their assets’ current value before further erosion occurs due to inflation.
It is worth emphasizing that quality companies consistently command premium prices, irrespective of prevailing economic conditions. This phenomenon springs from the inherent strength and resilience characterizing such businesses. Quality companies boast robust financials, a loyal customer base, well-established operations, strong barriers to entry, and effective management. These attributes leave them with the capacity to weather economic downturns, including periods of high inflation. Investors discern the intrinsic value embedded in these businesses and often exhibit a willingness to pay a premium for the stability and growth potential they offer. Business owners of such enterprises can leverage their strong market positions to secure attractive exit deals, even in the midst of inflationary times.
The prospect of comfortably living off interest income, the sense of uncertainty catalyzed by inflation, and the enduring demand for quality businesses collectively contribute to the reasons business owners are selling even in an inflationary environment. It is imperative for business owners to meticulously evaluate their specific circumstances and objectives before embarking on such a momentous decision. For those well-prepared, selling during high inflation can still be a prudent and profitable strategy.
Leah Berend is the Chief Financial and Chief Administrative officer of Oxbow Industries.
With over $2.5 billion corporate financial transactions completed, Oxbow Industries is dedicated to building businesses in partnership with their management teams. Oxbow seeks to invest in leading middle-market companies with outstanding leadership teams and a significant opportunity for equity appreciation. Learn More at www.OxbowIndustries.com