From the Trenches - Interview With California Business Broker Stewart Guthrie

Stewart Guthrie

Current market perspective from the trenches of the business acquisition & sale industry

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Sit-Down Interview With Business Broker Stewart Guthrie

What are your thoughts on where business acquisition & sale market activity is heading over the next 3-6 months?

For businesses in the Sacramento California region, the watchwords are caution for all and exhaustion for many. "Non-Essential" businesses, (that is, those businesses that have not been granted an exception to the governor's statewide stay at home order), in Sacramento and South Placer counties have just started the process of a controlled reopening when protests and their associated curfews came about.

To be sure, many small businesses chose to ignore the closure orders or are in areas unaffected by protests, but the situation has affected the mood and buying habits of the public and significantly suppressed commercial activity, regardless of location.

The social media gallows humor we have seen during the first half of 2020 is funny, dark and a hedge against the next shoe dropping. At the same time, per Guidance Financial, baby boomers, (those born between 1946 and 1964), make up 41 percent of main street business owners, second only to generation X, (1965-1979), at 44 percent. Even before the 2020 pandemic and protests there was a lot of discussion in the exit planning/brokerage/M&A market about the pending retirement years of the boomer generation.

The oldest members of this cohort are in their mid-70's and if there was ever a good time in human history to be a septuagenarian, it's now. It is not unreasonable for them to anticipate another ten to twenty years; the question is, do they want to spend those years in their business, pushing through a recession, (again, they've done it six times since the early '80s), or do they cash out now and enjoy a long retirement? I think we are going to see the boomer owners of solid, main street businesses in the Sacramento region make a choice for the latter. And, while a well run and documented business with solid fundamentals is always attractive in any market, our region has seen dramatic real estate appreciation, (approximately 100%), over the last ten years driven by a growing population and insufficient housing starts.

As employees and mid-level managers deal with declining incomes and or layoffs as a result of the region's pandemic response and cultural disturbances, I believe we are going to see a large influx of financial buyers, funded by home equity, that want more control over their lives and are willing to, (at least initially), "buy a job", with the goal of growing into business ownership. As always, the result of more money pursuing a limited commodity will be an increase in price. It's a great time to sell a good business.

What do you see as the most significant SELF-IMPOSED threats out there that could hurt the market for business acquisition & sale and small business activity in general?

Short-term thinking, all the way around. Times are extraordinarily tight and many small business owners are having to cut expenses across the board.

My hope is that when they see their way clear to start spending again, that they have a handle on the most effective portions of their marketing budget and that they get those back up and running as soon as possible.

Marketing budgets are early and frequent casualties during business downturns. This is exactly the wrong response, but understandable if the business owner cannot correctly attribute marketing dollars to new business.

Local SBA lenders have already noted that their goal is to be able to "carve out", March, April, and May in their business analysis because of current circumstances; they plainly state that they understand that it would be unfair to analyze 2020 tax returns in 2021 without acknowledging the effect of the pandemic response.

What this means is that, as soon as possible, business owners need to grow business volume back to a level that clearly shows that, absent a government-mandated shutdown, the fundamentals of the business are sound.

Not aggressively pursuing revenue recovery through marketing and sales will have consequences on business valuation in the next few years.

What do you see as the top three things the government needs to do to support the main street business acquisition and sale opportunities for small business owners through the remainder of this year?

Lift the shutdowns as soon as reasonably possible - This is not to decry government action in general, (like all government policy, it is a blunt instrument), but a CYA, zero risk mindset will extend the shutdowns longer than what is necessary.Statute(s) to limit liability for Covid-19 infections - If a small business owner opens their doors, their clients should be cognizant of the risk they are taking by participating in the economy and can choose to or not to engage with a business in person. However, since they can choose whether or not to enter a business, they should not be allowed to hold the business liable if they contract an infection Occupational Licensing Reform - This is a reform that will have a positive effect on the California economy in general as it has, for the most part, been put in place to protect the wages of those who are already in a given profession at the expense of new entrants without really enhancing consumer safety.

What do you see as the top three reasons to BUY a business in 2020?

Sacramento's population is growing. Relative to the rest of the nation, it is an expensive market, but relative to the rest of California it is inexpensive and an attractive alternative for high-wage earners and business owners in the San Francisco Bay Area.

Why buying an existing business is better than starting one from scratch according to Stewart Guthrie

The pandemic has suppressed economic activity. For a well-funded and sophisticated buyer or a strategic buyer, this will likely translate to reduced list prices for businesses. Some businesses will not recover, most will. Prospective buyers will need to move quickly if they want to take advantage of the discount.

The suppressed economic activity mentioned above will undoubtedly translate into pent-up demand for goods and services as the economy opens, (and the election recedes into the rearview mirror).

Regardless of who occupies the Whitehouse in January of 2021, there will be a surge in optimism as the country puts uncertainty and negative campaign strategy behind it for a year or so until the 2022 midterms.

Does it make sense to buy a business in a post-COVID World?

What are some of the questions a business owner should ask when choosing an advisor to help buy a business or work on exit planning to help navigate through this challenging stretch?

Business owners should ask advisors the following questions:

Does the advisor, (assuming the advisor is a business broker or M&A professional), support co-brokerage? While not a perfect correlation, this will typically translate into more and better qualified prospective buyers. Does the advisor have a list of professionals that a seller or prospective buyer can access to help through the business transaction?

The list should include at least, accountants/CPAs, attorneys, and financial planners but will likely include other, more specialized professionals.

If the business does not present a value that is sufficient, is the advisor equipped to provide support and direction until the business is ready to sell?

Choosing a Business Broker 101: Look for prior experience running a business

What is a business broker and what can they do for a small business owner?

How would you rate the current political environment related to small business growth, business acquisition & sales?

2/5

What are your thoughts on transaction terms for buyers & sellers in the current market?

I think that there will already be a COVID discount for buyers, this is the most significant cultural event since WWII. The real question is that buyers are incented to inflate the long-term impact of COVID while sellers are incented to minimize it.

We've already seen SBA lenders openly asserting that they will do everything they can to reasonably account for the effects of the pandemic while not unreasonably penalizing business valuations when they are likely to recover.

I think that's good guidance from smart people that have skin in the game; as a way to set criteria on who to listen to, it doesn't get any better than that.

Thoughts on business valuations in today's market?

I think that valuations are going to be heavily scrutinized by all parties involved. Sellers typically believe that their business is worth more than an industry-standard valuation as it is.

I believe that, without a clear explanation as to how the pandemic financials were dealt with in the equation, the assumption will be that the person doing the valuation penalized the business too much based on the pandemic.

The buy-side will want to emphasize the effects of the pandemic and will negotiate as if most or all the business lost in the pandemic is never coming back. The truth likely lies somewhere in between.

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