In the past, the rule of thumb was that 55% of business buyers were buyers of a job. However, in the next 1-6 months during the post-quarantine era of the COVID-19 epidemic, things will look quite different.
80% or more, not just 55%
According to the International Business Broker’s Association via the CBI designation education – a designation geared toward those who specialize in selling small businesses – 55% of buyers of small businesses are buying a job. However, this number will surge to 80% or more within the next six months. The COVID-19 virus is like a stampede through the middle of a small Wild West town. Everyone has locked themselves indoors until the stampede passes. However, when the dust settles, everything will be different. Businesses that have closed will not reopen. Low wage employees are not the only ones that will be affected; the middle class will also be searching for jobs.
Scarcity inspires creativity
Although the evidence likely doesn’t yet exist yet, the number of people in the middle class that are searching for jobs will increase significantly, perhaps from 10 people to 100 people per 1,000 people. However, the number of jobs available to the middle class will decrease significantly, also perhaps from 10 people to 1 person per 1,000 people.
Because of this, not only does the government have to react, but major corporations also have to be a team player. This is why we are seeing lots of very swift financial action taken by both the government and major corporations to help give relief to the public. In the United States, the Fed has decreased interest rates to almost 0%, federal student loans interest rates have been deferred, and state and local government entities are deferring payments like payroll taxes.
On the other hand, mortgage and commercial lenders are deferring payments by 90 days or more. Companies in the sharing economy and the restaurant industry are injecting hundreds of thousands of dollars into local programs like the New Orleans Business Alliance who are helping to distribute those funds immediately to those in need. However, what will happen when the dust settles? Scarcity will inspire creativity.
Interest rates are at almost 0%
I am not only still getting calls from buyers of businesses, but the type of people calling are lower and middle income people with $5,000 to $100,000 in savings or in the form of unused home equity lines of credit exceeding $200,000 of cash-convertible equity in their homes. It’s amazing to see such energy flowing through the phones.
Before I even get to the point of qualifying a buyer to see if they are even qualified to run any type of business, let alone a particular type of business that I have listed, buyers are telling me that they are not only willing to pay the asking price but that they are ready to close in 30-60 days. This “impulse to buy” is driven by historically low interest rates, which are driving not only a lot of people to refinance existing loans but also middle class people (who know they won’t have a job when the dust settles) to apply for HELOCS. Many are taking out HELOCS merely to stabilize their lifestyle because they can do it faster than via government programs, but some are starting to plan for the inevitable massive unemployment that will result from this epidemic.
Types of businesses of interest
“Trades and other industries where someone can pick up a hammer and saw or wire electricity will flood the market initially. However, those who are smart will spend less money on trying to build a business among extreme competition and instead decide to invest in an existing business with existing clientele. It’s easy to see that the name of a business and an existing customer list will become much more valuable as the extreme nature of the “flooding” of the industries like these will inevitably cause corners to be cut and for the market to react to this with greater loyalty toward established companies.
In terms of retail – likely the most affected economic driver of any city – it’s fair to assume that things will likely return to normal, but prices will need to drop. There will also be more sales and discount advertising without enforcement of now restrictive advertising regulations. The overall business and demand and supply for employment will remain the same, but the bottom line for the owners of retail, especially for higher priced retail companies, will decrease. These will be the companies that discontinue operations first.
In terms of retail business sales, buyers of businesses will be more willing to seek out and take risks on small service-related businesses like hair salons. The middle class is searching for a job to have an income, not an investment to replace former income that may be impossible to replace in the next 12-36 months.
Real estate, real estate, real estate
While interest rates are declining, people are beginning to apply for more loans. However, the supply of people who can also afford real estate in their investments (a more favorable option for lenders) will be far less than the demand from people who need small loans for smaller investments, with a higher degree of importance placed on merely generating income. Some people have recommended community supported micro-loans (like those through kiva.org), but the demand for commercial loans will be in the tens and hundreds of thousands, and traditional lenders will need to come down to meet demand because demand for larger loans from the upper middle class will conservatively evaporate in today’s economy.
Traditionally, by investing in real estate you decrease your available spending power in the short term in exchange for tax incentives and stability in the long term. The only reason you would not want to invest in real estate would be because you feel that you could generate more income in the long term in another investment than you could from the real estate investment.
The quantitative analysis gets blurred in times of crisis, and qualitative factors become a lot more apparent. In terms of the COVID-19 virus epidemic’s impact on the global economy, long term benefits will qualitatively become far less valuable in the short term. Income will be more valuable in the next 1 to 5 years. This means that the demand for real estate loans will decrease, and lenders who used to have restrictive policies on including stable real estate with loans will be forced to offer other types of loans. Initially, however, the focus will be on refinancing existing loans and HELOCS, and those with an immediate influx of cash will spend it, but the smart ones will invest it in a small business.
Russell Bernstein is a full-time business broker and Certified Business Intermediary (“CBI”) with the Commercial Division of the Keller Williams office in Metairie.
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