Acquisitions, done well, can be a powerful tool to accelerate revenue growth. And pushing for gains is vital in many industries where the rate of growth typically determines whether a company thrives, survives, or dies. However, acquisitions, done with ill-timing, can stifle growth by disrupting organic progression and slowing overall revenue gains.
So, the question must be asked:
Is now still a good time to double down on growth through acquisition?
We believe the answer to be a resounding “yes” for many industries. Here’s why.
Business Owners are Retiring Earlier
An interesting phenomenon has taken root post-pandemic and that is that many wealthy business owners are retiring earlier. In fact, 2/3 of wealthy business owners said the COVID-19 pandemic pulled forward their plans to sell their business or retire, according to a survey from Clarfeld Citizens Private Wealth.
But, why? Clarfeld reported that wealthy business owners came to value their time and families more during the pandemic and, therefore, are making the decision to cut back on work and business. In many ways, this reset of priorities has been good for both the business owner looking to hang his hat a little sooner as well as for the business owner flush with cash looking to acquire a new book of business. This scenario combined with higher-than-average business valuations and excess cash in consumer hands makes for a prime time to consider an acquisition for growth.
Interest Rates are Still Low to Borrow Money
Interest rates are often one of the most paramount considerations in an acquisition (unless, of course, the purchaser is paying cash). While interest rates can be defined as the price of borrowing money, they also are a factor in the supply and demand of credit. If the interest rates are low, firms and banks are incentivized to borrow and invest money. Low interest rates also make financing large purchases, like an acquisition, much more attractive.
But, interest rates aren’t anticipated to stay low for long as inflation climbs higher and the Fed plans to begin raising interest rates and tapering their bond buyback program. The majority of Fed members forecast three interest rate hikes in 2022 to fight inflation, making now the perfect time to consider locking in a low interest rate on the financing of an acquisition.
Valuations are Still Attractive to Acquire
An accurate valuation of a business is an essential tool for the acquirer to assess both opportunities and opportunity costs as they plan for future growth. Many failures occur when the acquiring company pays too much for an acquisition. A good example is Quaker Oats’ acquisition of Snapple in 1994. At the time, some industry analysts estimated that the $1.7 billion purchase price was as much as $1 billion too much. The stock price of both companies declined the day the deal was announced and a downturn in the market for New Age drinks quickly led to performance problems. It was only 28 months later that Quaker sold Snapple to Triarc Companies for less than 20% of what it had paid.[i]
Acquisitions tend to heat up when economic conditions are poor due to the fact that consumers spend less and companies find it hard to stay afloat, often selling at a reduced price. Of course, we certainly aren’t experiencing an economic downturn at this time by any stretch, but many industries still have attractive valuations for acquisition. For those looking to accelerate business growth, an acquisition could be just the ticket to business growth as we enter into 2022.
Trivium Point Advisory and LPL Financial do not provide business valuation services.