Buying a Business, the Downside(s) of Low Interest Rates

“I’m looking to buy a business, but I’m having the devil of a time doing it. Can you help?” Frank (not his real name) sold his profitable medical supply company two years ago, and is eager to get back to creating value through business ownership. He doesn’t have to work, the money he put in the bank after the sale of his company provides more than enough to take care of his family. But just 42-years old, Frank said he couldn’t see himself sitting on the sidelines just watching his investment portfolio.

As we talked over lunch at his very nice country club, Frank said he is ready to invest up to $5 million in hard cash and had borrowing capacity of another $6 million. Suffice it to say, Frank isn’t a tire kicker; he is a credible buyer.

Knowing that Frank has money and experience, I asked, “Why are you having difficulty finding a good opportunity?” His first response was pretty much what I expected because I hear it all the time, “There doesn’t seem to be a steady flow of solid companies coming on the market, and when they hit the market, they go fast.

His response led to my second question, “Why do you think we don’t see a steady flow of companies coming on the market yet statistics tell us baby boomer business owners should be retiring in droves?” Frank’s response surprised me, yet demonstrates how astute he is. “Dad gum interest rates are just too low,” he replied. I guess he could see from my reaction that I didn’t understand. Frank went on to tell me of four or five recent conversations he’s had with business owners who, by age, should be thinking about retiring. Frank described a trend he was picking up from those conversations. With interest rates at historic lows and the stock market at historic highs, smart business owners don’t feel good about how they’d reinvest proceeds from the sale of their business. Frank told me one business owner described it like this, “My business cash flow is growing 5 to 6 percent a year with no visible sign of distress on the horizon, I feel I have less risk staying in my business than selling now and reinvesting the sale proceeds in the stock market.” Frank told me another business owner (in his late 70s) said, “My rate of borrowing is so low, I have way less risk in my business than I used to have. Heck, it’s just now getting to be fun again.”

As Frank and I sat on the veranda overlooking the first tee, we swapped stories of conversations we’ve had with business owners. We came to the same conclusion at about the same time, a low interest rate environment is one reason, perhaps the main reason, baby boomer business owners aren’t retiring as rapidly as has been predicted. If you own a business that is doing well and enjoy going to work every day, you might be better off not selling for a while. After all, the alternative of putting the money in “safe” investments isn’t very exciting. And when your borrowing cost is less than your safe reinvestment rate, why not continue to leverage your business growth?

Frank told me he will continue his quest to find a business to buy. “Now that we’ve had this realization, I am going to retool my focus,” he said, “I am not going to look for a good business, I am going to look for a business that is broken and needs help. There are a lot more of those out there.”

Sadly, I have to agree with Frank on that point. In this low interest rate environment, businesses that are attractive to most buyers aren’t coming on the market at great speed. Unless buyers are willing to adjust their search parameters, there will be more time on the veranda and less time in the arena.

 

 

JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee.

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Tennessee Valley Group

Jim Cumbee established Tennessee Valley Group to help business owners fulfill their dreams for life after business ownership. It’s a mission that his 30+ year career history had prepared him well for—in addition to being an attorney, transition mediator and business broker, Jim has been a buyer, seller, and entrepreneur. His broad range of experience gives him unique insight into how business buyers and sellers can achieve their goals.

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