Highlighting some of the trends we saw in Q2 and what to expect.
Today I’ll give you an update on what the second quarter of 2022 was like and what we can expect moving forward.
In certain markets around the country, there simply aren’t enough workers to fill available jobs. Since Q4 of last year, this trend has put downward pressure on companies’ profits and sales. A few companies in our portfolio have ready and willing buyers, but unfortunately, the profits of these companies have decreased due to labor shortages. This doesn’t mean that we cannot sell—it just means that we’re not in the best season to sell. We are waiting for labor shortages to ease up, and as revenues start to rebound, conditions will become more favorable.
Another trend is that buyers are pricing in higher interest rates despite the uncertainty in the economy. There are two very different markets depending on price, but let’s first discuss businesses valued at $6 million and under. We are already seeing pricing challenges in that range.
Buyers are going to third-party banks or their financial institutions to borrow money to finance the deal. The cost of that money has gone up significantly, so there is downward pressure on prices. We’ve seen about a 7% drop in prices compared to Q1. Cash injection requirements have also increased. Banks and financial institutions require buyers to bring more cash to the table. About 40% of buyers are saying that interest heights are impacting their ability to purchase a business.
If your business is valued above $6 million, we’re surprisingly not seeing any effect on valuations and what buyers want, but I think it’s temporary. It’s just taking longer for that market to catch up. In Q1 or Q2 of next year, capital requirements may become more difficult, there could be challenges for private equity and national buyers, and some of the prices will start to come down.
In our conversations with buyers, around 40% said they’re looking for recession-proof businesses with steady cash flow and a reliable workforce. Many buyers are only looking at high-quality companies now. If you had a medium-quality business last year, there were still a lot of buyers willing to take the risk, but now buyers are shying away from that. If you have a quality business, you’re going to find even more demand now than you did a year ago. Your prices aren’t decreasing by 7-10%—you’re still getting a fantastic price just like you would’ve in Q1 of this year or Q4 of last year.
If you have any questions about the market or are interested in learning more about selling your business, feel free to reach out to our team at info@rbasells.com.
