First Vice President and Financial Adviser, UBS Financial Services
Industry experience: 14 years
The pandemic and a pending recession has left many business owners contemplating their own futures along with everyone else. Brian Lynch is helping them figure out what’s next.
Despite a drop-off in merger and acquisition activity this year the market remains competitive for some businesses, including mature companies, and buyers continue to pay premium prices in these deals, said Lynch, a Boston-based financial adviser with UBS Financial Services’ wealth management team.
Lynch is a certified exit planning adviser who works with businesses in the region on planning exit, succession and legacy strategies. After studying economics at Colgate University, Lynch decided to focus on wealth management and began working at UBS soon after graduation. Outside of work, Lynch participates in competitive obstacle course races, including endurance races that can last up to 60 hours.
Q: What is the environment like for small businesses right now?
A: Anytime you have an external event, like the pandemic or the current [interest] rate environment, it can get people to reassess some of their long-term goals and why they might be running the business. We’re certainly seeing a lot of business owners taking a step back and asking: What’s my three-year plan? What’s my five-year plan? How long do I want to run this business as a lifestyle business that might support myself and my family? And at what point does it make sense to look at this as a value-creation entity that could provide a financial windfall to support either my next venture or retirement?
Q: What are some trends driving business owners to think about making an exit?
A: Anytime you see a potential pullback in your own financial figures for your company, it’s going to give people pause. I think we saw some good years in the late 2010s and early 2020s, and certainly owners that are maturing may be looking around and deciding if now might be a good time to hit the bid, so to speak. As far as what we’re seeing in the world of companies that are transacting, there’s definitely been a shift in preference to more established and mature companies being sold. If you look at actual deal volume that’s occurred in 2022, it’s roughly half the pace of 2021. So, substantially fewer companies are being sold, but the valuation that those companies are getting is actually on par with 2021 and above its long-term average. It’s telling us that the companies that are best in their peer group and in their industry are still able to transact competitively. But with the era of free money and zero interest rates likely behind us, it makes it a little bit more challenging for some of the companies that aren’t at the top of their peer class to find an appropriate buyer.
Q: What are some of the keys that help find an appropriate buyer?
A: As interest rates go up, it makes the cost of any debt-fueled acquisition higher. Debt costs affect the buyer’s ability to finance the transaction, and it makes them view the debt on the balance sheet of the company that they are acquiring with more scrutiny than they would have when interest rates were near zero.
With inflation higher, that’s affecting operating costs across the board, whether it’s labor costs, input cost, supply-side cost. Buyers want to look at your detailed financials, legal documents, perhaps sustainability data and how you run the administrative side of your company. Those types of things that might have been glossed over a little bit in years past certainly will help you look more professional to a potential acquirer.
Q: Are some business owners waiting it out because their business might not be in the best shape?
A: You’re definitely seeing that. UBS did a study, and 58 percent of companies have actually never been formally valued by the owners, and 48 percent of business owners have no formal exit strategy documented anywhere. If over half of business owners have never gone through that process on a formal basis, they might be surprised by what the number is, and that could certainly give them pause. Our recommendation in all markets is to have an ongoing process and professionals around you so that you understand what makes your business valuable as an income-producing entity and what elements are most attractive to a buyer. Those two things are not always the same.
Q: Has the pandemic or interest rate environment changed how businesses approach their exit strategy?
A: One of the big changes is we’re seeing a lot more private equity transactions as opposed to strategic-buyers transaction. A private equity transaction generally looks at the seller’s standalone financial performance and cash flow and buys the business as its own entity. A strategic buyer will generally integrate the seller’s operations into their own. Without making any absolute statements, strategic buyers tend to pay a higher premium price than financial buyers. In this post-pandemic, resetting-interest-rate world, I think sellers would be wise to look more at the private equity side. There certainly are still strategic deals that occur but less than we had been accustomed to over the last few years
Q: What else should business owners keep in mind when considering exit strategies?
A: A general piece of advice for a business owner who’s considering an exit in the short- to medium-term – but really, just as a best practice for a company – is to get as much as you can documented about how your company runs. I think business owners, especially those who perhaps started the business when it was quite small – have a tendency to wear a lot of hats and keep internal a lot of what makes the company function and operate. The best way to run your company so that it is attractive in an exit, but also simply to run it as efficiently as possible, is to be more of a chairperson of the company as opposed to a key employee. The more intrinsically that you are integral to certain elements of the business, that can be a potential risk to a buyer – because if that owner is so involved in these key elements, what happens when that owner isn’t there?
Lynch’s Five Favorite Pieces of Gear for Obstacle Course Races
- Socks to keep his feet dry
- Headlamp to keep from getting sleepy at night
- Trekking poles
- Reese’s Peanut Butter Cups