Prudent investment strategy involves intelligently assessing relevant information quickly and taking appropriate action before an opportunity becomes common knowledge drawing a large crowd of interested parties. Approximately a year ago investors who identified the home improvement and pet industries as areas where people would spend travel, entertainment, and stimulus dollars available in their bank accounts reaped excellent returns on their investment. This occurred with investments in publicly traded companies and the acquisitions of businesses by entrepreneurs in 2020.
2021 is emerging as a robust year for business acquisition in the United States. IBA, as the oldest business brokerage firm in the Pacific Northwest, successfully facilitated numerous transactions in Washington & Oregon in Q1 of this year and has a double-digit number of deals in escrow pending sale for Q2.
The following are five reasons why 2021 is a good year to acquire a business:
- Pent Up Demand for Products & Services – What haven’t you done at the same level during the last year that you enjoy? United Airlines just announced that they are adding 480 domestic flights to their schedule in June (https://www.reuters.com/business/aerospace-defense/united-airlines-gets-summer-ready-add-over-480-flights-us-schedule-2021-04-23/). Americans have a strong desire to travel. Many people have not seen family, friends, or gotten out of their hometown in over a year. The travel & tourism industry is anticipating a strong rebound in revenue versus the summer of 2020. The same adrenaline shot is anticipated to the hospitality industry, as people return to their favorite restaurants and bars. Headed out, what do you need? New clothes, a haircut, cosmetics, etc. It is easy to see how a rising tide will surge through local economies lifting all small and large businesses that have survived the COVID-19 storm. Identifying a quality business for acquisition that is headed back toward historical strong performance has the ability to be an investment at the right time and place.
- Inflation – The significant injection of federal spending into the economy in 2020 and 2021 has a probability to spur a period of inflation. Inflation can be detrimental to the purchasing ability of employees, if wages do not increase in alignment with inflation. Inflationary periods are historically good times to be a business owner. Let me provide you with an example why this is often true. Consider a company doing $2.5 million in revenue where net profit on the federal tax return is 10% or $250,000. If the cost of goods of this company increases 5% due to price increases by their suppliers and the national media is talking about inflation, an offsetting 5% increase in company pricing can often be justified to customers. This price increase would result in the company increasing its sales to $2,625,000 even without natural organic growth. Now, if all company expenses increase 5% staying in alignment with inflation, this change would result in 10% of the enhanced revenue or an additional $12,500 falling to the bottom line. However, in all likelihood the percentage falling to the bottom line would be greater as some expenses like rent, which may be set or capped in terms of increase, would likely not increase at the same level as others. In my 28 years as a business broker, I have observed numerous times intelligent, proactive business owners who find justification for increasing company profitability based on public perception. A prime example that may be relevant again with changes in energy policy out of Washington DC is charging a fuel surcharge to customers. Yes, fuel prices are rising, and a HVAC company may be paying $5 – 10 more for fuel on a service call, but a $25 fuel surcharge also is an opportunity to increase company profitability incrementally. Pennies add up to nickels, nickels to quarters, and quarters to dollars. This is true for an entrepreneur whether it is a penny saved or a penny earned. Intelligent, dynamic pricing can be the difference between moderate and excellent profitability for a business.
- Interest Rates – Interest rates are at historically low levels. Significant federal incentives exist to encourage business investment through Small Business Administration (SBA) backed loans currently. The cost of capital will likely be greater in 2022 than 2021. All of these items point to a reason to act sooner rather than later on a business acquisition.
- Tax Rates – The federal government has targeted increased long term capital gains tax rates as a method of paying for government stimulus during the COVID-19 pandemic. Historically, these rates have ranged from 15 – 35% over the last 50 years in the United States. They are currently sitting at 23.8% in 2021. Many entrepreneurs are trying to complete business sales in 2021 before the rates increase 5 – 15% resulting in a significant decrease in the net proceeds they receive from the sale of a privately held company, family business, or commercial real estate. This motivation for sale is creating some unique acquisition opportunities, especially involving mature businesses being sold by Baby Boomers to facilitate retirement. Once new tax rates are established, the volume of businesses on the market may diminish as the urgency to sell now will be reduced.
- Demographic Change – I recently returned from a trip to South Carolina and had an opportunity to see the new Boeing facility on my visit. The fact that Boeing now has locations in Illinois and South Carolina bothers me as much as the Supersonics being renamed the Thunder and playing in Oklahoma City. Both the Sonics and Boeing are part of the fabric of Seattle and government fumbled the ball in not creating sufficient incentives for both to remain entirely in the Pacific Northwest. Demographic change is occurring in the United States. The Pacific Northwest is blessed to generally be an area seeing population growth, however even locally we are seeing population leave the cities of Portland and Seattle out of safety, education, and quality of life concerns. This movement is creating entrepreneurial opportunity. An entrepreneur who can see the future in terms of population trends has the ability to secure a 50 yard line position in a new or emerging economy. I have witnessed many times a local restaurant that suddenly sees a six figure increase in revenues when construction of a new residential development, office building, or school is completed. Knowledge is power. Permitting occurs months to years in advance of construction. Information is readily available that can facilitate identifying the next Sammamish or Hillsboro in a metropolitan area.
- Technological Change – A construction contractor recently shared with me information about his increased efficiency created by COVID-19. Pre pandemic 100% of his company’s bids were done onsite. Windshield time limited the number that could be completed in a day. As a result of the pandemic, he transitioned to preliminary bids done virtually employing Zoom and client phone photos sent by email. This evolution allowed the company to determine the projects they wanted and assess the seriousness of the purchaser about completing a transaction with a significantly reduced time allocation between customer engagements. It also increased productivity and profitability. Many business models improved because of modifications motivated by the pandemic. A buyer who identifies the time & expense invested in modifications to a business model that are not readily apparent in company financials has the potential to buy a company as a value proposition before the improvement is incorporated into business valuation models. Only the top business brokers in the profession have the ability and acumen to dynamically update business pricing employing interim financials. Most business appraisers, accountants, and intermediaries will rely on federally filed tax returns as the foundation of their assessments.
Buying a business requires confidence and action. In the Main Street and Middle Markets prudent investment can return 15 – 50% in the marketplace served by IBA. These are investment returns traditionally not achieved with stocks, mutual funds, and real estate. They also incorporate the risk of direct management. If you are looking to buy a business in 2021 in the Pacific Northwest, the professional intermediaries at IBA would welcome the opportunity to provide an overview of how we work with buyers and the privately held companies and family businesses we are currently representing for sale. Our inventory is always changing, but it has traditionally been the deepest and one of the best available in Washington and Oregon.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, accounting, legal, wealth advisory, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.