Given our stock market volatility, massive federal debt and ongoing spending, high unemployment, and general economic uncertainty, it’s no wonder many investors are currently sitting on cash and metals. However, our current economic environment could be ideal conditions for certain business buyers. Here are seven simple reasons why now could be a very good time to invest in small businesses.
1) Aging Population
There are more business owners nearing retirement age than ever before. Many of these individuals have experienced massive declines in their investments and do not have time to wait for their investments to recover nor can they bear the added risk of dramatic losses in business profits. As a result, many are anxious to sell in order to get some “chips off the table”.
2) Low Business Valuations
The uncertainty of our economic and political landscape – taxes, benefits, healthcare, spending – has caused many investors to take greater positions in cash and cash equivalents and wait for greater certainty before jumping back into the market. As a result, many larger companies lack the capital needed to boost ongoing operations and profitability and, thus, carry a lower current valuation. Since stock prices of larger companies often impact the comparable valuations of smaller companies, many small businesses may be undervalued, creating buying opportunities for investors.
3) Low Financial Projections
Slow economic growth and an ongoing pessimistic economic outlook contribute to lower financial projections for many businesses. While in this slow growth period, many current business owners may be willing to sell at a reduced value.
4) Low Interest Rates
With interest rates at or near historical lows, the cost of capital (for those that can obtain debt financing) is, in many cases, cheaper than it’s been in decades.
5) Tight Credit
Our current tight credit environment makes it difficult for business owners to obtain debt financing. As a result, many are now turning to equity financing – bringing on investors – to fund ongoing business operations.
6) Quality Workforce
High unemployment means more qualified workers willing to work for less. Small business buyers have the opportunity to expand operations and improve profitability by hiring from a pool of perhaps better qualified individuals who are eager to work.
7) The Warren Buffett Principle
“Be greedy when others are fearful.” In 1974, amid a struggling stock market and lagging economy, Buffett told reporters: “Now is the time to invest and get rich”. Buffet was right. Our current economic “storm” could again provide a tremendous opportunity to take advantage of the buying opportunities at a time when most others are fearful.