Evaluating the True Risk level of Your Acquisition

Many times we wonder to ourselves, is this the right time to buy companies or is it a good time to do an acquisition.

During the last cohort, we ran our Ask-Me-Anything style session with one of the leading SBA lenders in the country.

Throughout that call, the conversation took a dark turn focusing heavily on defaulting and understanding the potential ramifications of that.

“What happens in the event of a default? How badly am I screwed”

These are great questions and one of the reasons we host that call in the first place. We intentionally to give our members the opportunity to ask ANY questions that they have in a safe environment without the possibility of having the topics reflect negatively on them to a prospective lender.

This gives them the opportunity to really understand how this whole concept of SBA loans work.

In the last Search Forum, we had a conversation with a member who voiced concerns about the high multiples he was seeing in the market right now. He felt like because these valuations have continued to get stronger and stronger paired with how quickly businesses are selling that the market is really hot.

This raised the concerns:

“Am I going to end up paying too much if I buy a company right now?”

“Is this a bad time to buy?”

“Is there going to be another 9/11 event or real estate bust or tech bust in the near future?”

All of these are really good questions to ask. It’s important to take a very level headed approach to what it is that you’re doing. There’s no need to belittle the amount of risk that comes with acquiring a company.

You do have to step and take responsibility for the outcome of a company you’re acquiring especially if you’re carrying a personal guarantee with a portion of your financing.

When these sessions turn to this topic, there’s nothing that we can say to calm the fears of defaulting or market timing. These are all external things that are happening.

Let’s talk about SBA Loans first. Over decades the default rate has maintained under 1.7%.

I just got off the phone with one of the leading lenders for business acquisitions in the country, asked them specifically, what is your default rate over the course of your career? He said less than half a percent.

If we look at the data and research coming out of Stanford, we can start to get our arms around statistical evidence around what really happens, right?

Sixty-nine percent of business acquisitions that end up getting on average a 33% internal rate of return on their original investment. That means 69% at least doubled their money.

Nine percent of them get a 10X return over a five-year period.

Twenty-nine percent end up either taking a partial loss or a full loss on their original investment.

This data tells us the likelihood of defaulting should only be a small portion of the full risk you’re considering.

Let’s turn our focus toward potential market risks. What empirical evidence do we have to consider?

Let’s talk in hypotheticals here. You know what, I’m going to predict that the stock market is going to crash next year. If I write that article for Forbes, everyone’s going to read it because it applies to everyone. No one wants to get caught in a stock market crash. Many people have some portion of money in the stock market and don’t want their money to go away. Right. So they want to read the article to figure out how to react to this like huge potential pessimistic thing that’s going to happen.

On the other hand, if I say the economy is going to boom. If I predict that it’s going to go right back to where it was prior to COVID and increase over a 14 year period. It’s likely that no one wants to read that article. It’s exciting, but isn’t going to get mass market appeal. Everyone wants to hear the pessimistic story because it sounds intelligent. Everyone equates the “overly optimistic” perspective as wishful thinking versus being based in data and logic.

Something to remember is that the most successful entrepreneurs have a growth mindset. A concept coined by Carol Dweck with this framework that shows the most successful entrepreneurs view the world as malleable and that they are capable of learning anything. They see a problem and think that they can solve this regardless of the amount of “failure” along the way. They are the one to do it.

When you acquire a business, I don’t want you to be hyper-focused on the possibility of defaulting. I don’t want you being completely focused on, am I buying at the wrong time?

You can’t know, no one can time the market.

Instead, focus on: Am I the right person to do this? Am I going to succeed? Can I lead a team? How can I double this business to build a vehicle for wealth for me and my family? How can I work my own time in my own career for my own business, for my own brand and grow a team, a business, a brand? How can I help my customers?

These are the things that are going to solve all of the problems.

And so it’s not about, are you buying it the right time?

It’s not about, am I going to default?

It’s all about focusing on the things that actually matter and doing the things that leads to the outcome you want.

Listen, I believe buying companies is the single greatest opportunity of our generation. And almost half of the small business economy needs to change hands by the end of this decade.

If you are interested in acquisition entrepreneurship and are looking to buy a company in the next six to 18 months consider apply to the Acquisition Lab, we have built the first do it with you Buy-Side advisory service. We work in small cohorts of vetted members that go through a short onboarding period to prepare to go to market with a strong brand and structured framework. Once our members are ready to search, they gain access to our panel of advisors. We have office hours with our skilled acquisition entrepreneur advisors nearly every day of the week. Each with different strengths and weaknesses where members can talk about any topics that are coming up in their search. Please click below to apply if this sounds like it might be a good solution for you or visit www.acquisitionlab.com to learn more.