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Challenges Predicting the Path of the Economic Recovery

Robert Knauer
2 min read

By Will Zimmermann

It is incredibly hard to predict the future, especially the future of the economy. How would I have predicted the economic future earlier this year?

In January 2020, I would have warned of the potential of an eventual correction in the market or a potential recession on the horizon with no mention of a looming global pandemic. After all, the stock market in January was at an all time high and had been consistently gaining for over a decade. The longest bull market on record couldn’t last forever and certainly would leave many firms’ equity dramatically overvalued.

In March, I would have given a starkly different forecast of the economy, for obvious reasons. With the pandemic dramatically touching every aspect of economic life, the impact on the economy would be severe. This forecast would have given cause for alarm about a potential deep recession and perhaps even a collapse in the credit market due to falling corporate earnings.

Writing this in June of 2020, however, my predictions perhaps fall somewhere between the two futures outlined above. I’m more pessimistic than I would have been in January but also more optimistic than I would have been in March. With the release of additional data, the prospects for America’s economic recovery seem more promising and markets have nearly risen to pre-pandemic highs. While such a quick rally is probably premature, markets are also much more oriented to future earnings so this could signal that corporate earnings past the next few months still look relatively healthy.

What does this all mean for the future of small businesses? As can be seen, it’s hard to place a lot of stock in prediction and it will always be severely lacking compared to hindsight. The next few months will have many hopeful and pessimistic headlines. The reality is that these headlines won’t be as helpful as they seem. Businesses will recover when consumer spending returns. Some consumer behavior will eventually return to normal and some of it will be reshaped by the quarantine and pandemic. This will vary from industry to industry and determine the future prospects of many small businesses.

Can You Sell A Business in Times Like These?

Robert Knauer
2 min read

The answer is yes — but with certain caveats.

As of this writing in early-May, the length and ultimate severity of the current public health crisis remain unknowable. However, the impact that it has had on our economy over the past two months leaves no doubt that it will continue to have a major impact on business transactions, just as it has impacted everything else.

For owners interested in selling their business, there the prospects are not as grim as they may seem. For one, many long-term investors such as those backing Eagle Peak Capital Partners take solace in the track record of the American economy, which has its ups and downs but has proven to be resilient over time. Warren Buffett spoke to this point during his virtual annual meeting this past weekend. Additionally, there is still a large amount of capital that has yet to be invested, including almost $1 trillion available for buyouts. This distinguishes the current crisis from the 2008-09 Global Financial Crisis, as does the continued availability of debt. That's the good news.

Yet there have been relatively few business transactions of late as many buyers take a "wait and see" approach. Here are some of the reasons why things have slowed down:

It's not easy to determine a fair value — This is a challenge in the most 'normal' of times (see related post), but it is particularly challenging right now given the wide range of potential economic outcomes, which range from a fairly quick recovery to a prolonged depression. Values from earlier this year are no longer valid, as they do not account for the increased risk present today. Additionally, buyers will be sizing up businesses in a different way than they had previously, focusing more of their attention on metrics such as cash reserves than on growth potential than they had prior to the crisis. Over time, the process of price discovery will unfold, and the market will shed light on reasonable valuations. This happens quickly in the stock market but will likely take a period measured in months when it comes to private companies, and in the interim will make it more challenging (though not impossible) for sellers and buyers to agree on a price.

Risk — Just as sellers must agree to a reasonable price, they will also face the additional challenge of agreeing on how to share risk, so the terms of deals in this new environment may be different from those involving deals that occurred just a few months ago. These largely come in the form of downside protection for buyers and take the form of provisions like earn-outs and seller notes.

Mindshare — Many investors and banks are spending much of their energy managing the businesses and loans they currently oversee. This alone does not preclude a deal from occurring — after all, deals are how they make money — but it means that the transaction will have to be that much more appealing to gain their attention.

Eagle Peak Capital Partners and its investors remain committed to acquiring and managing a single, great business, just as it was prior to the crisis. Please visit eaglepeakcap.com/resources for additional seller resources and feel free to reach out to rknauer@eaglepeakcap.com or fill out the form below if we can be of help. Thanks, and stay well!

Five Questions to Ask a Business Broker

Robert Knauer
2 min read

Business owners interested in selling their companies often turn to business brokers, investment banks, and other intermediaries for help. These middlemen can provide valuable advice and can guide you through the process, but in return they charge substantial fees. If you are considering enlisting a broker or other intermediary to help you sell your company, here are five important questions to ask them:

What is your fee structure? This typically depends on the size of the company. Brokers typically charge smaller, main street businesses with under $1MM in revenue a commission of about 8-12%. Larger firms sometime charge commissions based on the “Double Lehman” formula — 10% on the first million, 8% on the second, 6% on the third, 4% on the fourth, and 2% on the remainder. This means that a company that sells for $8 million would be charged $360,000 in brokerage fees, a 4.5% commission. There is usually a minimum commission, and some firms charge a retainer.
Who are your references? A professional, experienced business broker should have testimonials and references that you should be able to call.
How many listings do you have? The average business broker will have 15-20 listings at any given time. If the broker is representing too few listings, it could be a sign that they aren't experienced, motivated or capable. Conversely, if the broker represents too many, you run the risk that your sale may not receive the attention it deserves.
What do you know about my business? Brokers often have expertise in certain industries. Those that lack expertise should manifest an interest in learning about your company and your situation so they can negotiate a deal that accommodates your desired financial and non-financial outcomes.
How do we maintain alignment of interests? Sure, both you and your broker will want to sell your company. But you should do your best to determine whether the broker is interested in selling your company at the right price and to the right buyer. The more businesses a broker sells, the more commissions that broker earns — variations in sales price and quality of buyers will have little impact on the livelihood of a broker.

Eagle Peak Capital Partners does not require you to hire a broker to sell your company, allowing you to retain more of the sales price. While you would benefit from using your own accountant and legal counsel, we are able to guide you through the process, enlisting the help of an experienced team of investors and professions. For more information, please send me an e-mail at rknauer@eaglepeakcap.com, and you can also view our guide to the business transaction process here.