On Your Mark, Get Set, Go: Follow the Money
By Brian Mazar, MBA, CBI

Reflecting an increase in consumer confidence, today’s issue of the Wall Street Journal reports an uptick in M&A activity, which tends to reflect the rise and fall of the GDP. Exxon Mobil’s $31 billion purchase of XTO Energy Inc. tops Warren Buffet’s $26 billion railroad purchase, which sent positive shock waves through the M&A community earlier this year. Other deals brewing around the same time period, such as the merger of Stanley Works and Black & Decker, or the purchase of NBC Universal by Comcast Corp, continue to reflect a strong belief in the economy and its subsequent recovery. Whether these large deals have a direct impact on the economy or vice versa, the fact is that M&A activity for the past twenty years has bounced back after a recession, and then surged on ahead in a show of economic strength. These positive economic moves filter down to small businesses, reflecting an increase in buyer and seller confidence. According to the journal, Fortune 1000 companies are sitting on $1.8 trillion in cash, and a greater percentage of large companies have more cash on hand than at any time in the past 40 years.

Many businesses unintentionally increased their value drivers as their owners struggled to keep their companies afloat during tough times. Non-profitable accounts were shed, expenses decreased, the workforce was streamlined or in some cases strengthened by hiring top talent, technologies were upgraded, and in general businesses were positioning themselves to be stronger and ready to pounce when market conditions changed. These market conditions are now improving.

In the meantime, many buyers have been sitting quietly in the corner holding on tight to their money bags, waiting for everyone else to start jumping in and buying before they would do likewise. As GDP continues to grow alongside the upswing in consumer confidence, many of the larger firms are gaining confidence and moving quickly to secure desirable acquisitions. According to the Bureau of Economic Analysis, U.S. Department of Commerce, the personal savings rate in October of 2009 rose to 5%, as compared to the 0-2% average savings rate of the past eight years. This increased savings rate represents buyers, flush with cash, sitting on the sidelines, waiting for the other American consumer to jump right back in and start buying so they will feel comfortable doing the same thing. Call it the human herding instinct, if you will.

Ultimately, what this emerging economic growth translates into for business owners who are hoping to sell their businesses and make their spouses happy (or sad, as the case may be) is that buyers will have more liquid assets available to put towards an acquisition. Typically, a strong buyer should have 20-25% of the total purchase price available in cash. This type of financing assures the seller that the buyer is serious and committed to the success not only of the business transfer but also committed to the growth of the company being purchased. With a strong 20-25% downpayment, SBA loans become more feasible.