It's Not A Buyer's Market Yet, But Sellers Are More Flexible

With the cost of capital rising, a recession supposedly right around the corner, and general liquidity lower than it has been for a really long time, you’d be forgiven for wondering if now is a good time to buy a business.

SBA loans are 11% and you’re wondering if you should slap a PG on that shit and hide behind the sofa.

Those of you who are astute enough might be thinking the opposite and wondering if a buyer’s market, when the buyers have the power and sellers are desperate, is finally upon us.

Many people predicted we’d see a buyer’s market in 2020, when in fact we were right at the start of one of the craziest “everything bubbles” we’d ever seen.

2020-2021 was categorically not a buyer’s market, it was actually a fantastic time to sell.

Thanks to Thrasio (R.I.P) and a bunch of other aggregators (R.I.P), fuelled by low interest rates, a ten year bull-run, and a shit load of fuck-you money being thrown around, multiples for online businesses (and pretty much everything else) soared.

Many of us sat around scratching our heads saying, well this doesn’t make much sense, but we also had a teeny tiny amount of FOMO to go along with it.

And then…it ended.

You don’t need me to recap the last couple of years, but suffice it to say, the days of cheap and relatively easy capital are over, and interest rates are probably not going back to 0% anytime soon.

And that’s probably fine. Interest rates in the 3-5% range are probably more sustainable. The world will be better for it.

(Would you like fries with that Cope Mr Wells?)

But the most frustrating thing about 2022 and the first half of 2023 was that sellers still wanted a ton of cash up front for their business, and multiples were not coming down.

A business that cost $4m in 2021 would probably sit on the market a few weeks or months longer, but it would still go for $4m eventually, and mostly the same structure (a boat load of cash up front).

But throughout 2023, something started to change.

The higher cost of capital finally caught up with the market. Funds that raised money in 2021 and were cashed up for all of 2022 have slowly run out of, or finished deploying it.

Liquidity has dried up thanks to the collapse of SVB (R.I.P) and suddenly sellers are more willing to be flexible.

They’re not getting the same offers they got before. The multiples people are willing to pay have gone down too.

It’s obvious in hindsight.

Multiples are driven by the availability and cost of capital. If that cost goes up, people pay less for your business.

But, this is also a good time for sellers. if you sell your business, you can put that cash into treasury bills and earn 5% RISK FUCKING FREE, or stick it into the S+P 500 at a lower level than it was two years ago, while tech companies just continue to print money.

Buyers will pay less for your business, but the money you get should earn you better returns.

All in all, things have more or less balanced out, which is actually helpful for buyers.

Seller financing is more in vogue than it was a few years ago, and I think this is a trend that will continue throughout 2024.

I don’t see cheaper capital becoming available until 2025, which means people need to get more creative.

I literally have 3 deals in my pipeline that are 30% cash up front, 30% preferred shares (a form of payment admittedly unique to Onfolio), and 30% seller finance.

I don’t think I ever had a single deal that would take 30% cash up front before 2022, and now I have three.

But here’s the thing.

These are all excellent businesses that I’m excited to dig into. They’re not desperate sellers trying to get out while they can. They’re not pulling the rip cord before they run out of cash.

They’re just aware enough of the new reality to understand what needs to happen to get a deal done.

So I don’t think we’re in a buyer’s market just yet.

For that to happen, there needs to be a prolonged recession, not just one that flirts with you and then never shows up, like that girl from high school (R.I.P).

And lower multiples don’t necessarily apply to every business either. The cream rises to the top, and the best businesses out there will still command a higher multiple and have buyers bidding for the deal.

On average though?

We’re back to 2019 multiples with better structures for buyers (less cash up front baby).

What’s good is that the economy remains strong, so instead of sifting through a bunch of failed businesses, we’re probably just going to have to use debt less from banks and more from sellers, but will end up with stronger acquisitions in the process.

For us, we’re also starting to have sellers retain some equity in their business, which is another reason why they’d want to be flexible.

This is something you can consider offering too and is not just unique to Onfolio.

Interestingly, I’m starting to see people be more flexible in a wider world too.

My landlord is currently in the process of selling the house we’re renting, which means we need to find somewhere new (nobody talks about the hassle of being kicked out of your home when saying it makes more sense to rent than buy).

We told her we’d be interested to buy it ourselves, but we don’t have the cash to pay for the downpayment.

Yesterday I got a call from my wife.

She said “The landlord is willing to help us out if we can’t come up with the cash for the downpayment. Have you heard of this thing called seller financing?”

2024 is going to be interesting.

Dom

P.S I'm hosting a free webinar this coming Thursday at 10am eastern to just share everything I've seen and give my thoughts for 2024.

This will benefit you if you've been wondering if now is a good or bad time to buy (or sell) your business.

If you're an Onfolio shareholder, it will also be insightful.

I'll share some strategies for raising capital, some ideal acquisition structures, and my general thoughts.

It's 100% free.

It WILL be recorded, so send your questions in advance if you can't attend.

Register for the webinar here.

You can also subscribe to our Youtube channel where the replay will be hosted.