Ep. 356 — Brian Beaulieu, Jeff Buettner & John Thwig: When the Tide Goes Out — Banking, M&A, and SBA in a Rising-Rate Market

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Episode Summary

Your bank just got nervous, your line of credit got tighter, and the deal you priced last summer doesn’t pencil at today’s rates. Three banks have failed since our last quarterly update. Credit is tightening even at the healthy regionals. The office-space refi wall is starting to creak. And the same private equity firm that paid premium multiples eighteen months ago is now wider on the bid-ask than your seller expectations can stomach. I brought Brian Beaulieu at ITR Economics, Jeff Buettner at Butcher Joseph, and John Thwig from Live Oak Bank back for the Q2 2023 update. Brian walks through which banks were swimming naked, where commercial real estate is bleeding (and where it isn’t), the ITR business cycle phases for housing, non-residential, GDP and autos, and why the sticky inflation living in labor isn’t going anywhere. Jeff breaks down what rising rates are doing to PE return profiles, why ESOPs are competitive again because of the tax shield, and how warrants and PIC structures bridge the value gap. John walks through the new SBA SOP changes that finally unhook ownership from leadership: partial buy-ins are allowed, sellers no longer have to exit within twelve months, and seller-financing standby drops to 24 months.

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## Top 10 Takeaways
  1. The tide going out shows who was swimming naked. Your supplier or customer could be next.
  2. Your line of credit should have been negotiated six months ago, not the day you need it.
  3. Office space is 14% of commercial real estate, but it’s the slice carrying a refinancing wall into 2024.
  4. Demand data lags reality by seven to 18 months. By the time you see the trend, you’re already late.
  5. Lock supplier contracts to CPI, customer contracts to PPI. The spread is your margin.
  6. Sticky inflation lives in labor. The Fed can crush demand, but it can’t manufacture skilled workers.
  7. Bid-ask spreads widen when debt gets expensive. Sellers anchor to last year. Buyers price to today’s cost of capital.
  8. ESOPs are competitive again because the tax shield closes the gap PE used to win with cheap leverage.
  9. Warrants are deferred variable interest tied to value. They align everyone to the company’s real future cash flow.
  10. The new SBA SOP finally unhooks ownership from leadership. You can take chips today and keep operating.

Sound Bites

“Buffett once said, there’s nothing like the tide going out to find out who’s swimming without a bathing suit. So now we know who was swimming without a bathing suit.” (@TBD) — Brian Beaulieu

“If you need a body in your warehouse, or you need somebody on that truck, or you need somebody wearing that pair of boots to get the job done, they’re darn difficult to find. And you’re likely going to keep paying them.” (@TBD) — Brian Beaulieu

“You’ve got a kind of a wider bid-ask spread, for lack of a better term, the value that sellers are hoping to get for their asset relative to the price buyers are willing to pay.” (@TBD) — Jeff Buettner

“It actually might be the more lucrative route to pursue with the net tax savings available to you.” (@TBD) — Jeff Buettner

“My buyers are what I call people. So in other words, my buyer is not necessarily an entity or an organization or a fund. It’s a person.” (@TBD) — John Thwig

“SBA has two primary missions: to preserve the jobs of the primary entity, the small business enterprise, and to preserve the income tax basis that drives. SBA’s mission isn’t really to give a seller a liquidity event.” (@TBD) — John Thwig

About This Episode

This is the Q2 2023 Economic & M&A Market Update, a quarterly three-segment format with Brian Beaulieu (ITR Economics), Jeff Buettner (Butcher Joseph & Co.), and a returning guest, John Thwig (Live Oak Bank, the largest SBA lender in the country by dollar volume for five consecutive years). Brian co-authors ITR’s research and books (Make Your Move, Prosperity in the Age of Decline) and the firm tracks 94.7% forecast accuracy across 70 years. Jeff leads M&A work at Butcher Joseph with a focus on ESOPs, private equity, and strategic transactions. John spent 28 years at Wells Fargo before joining Live Oak; he specializes in SBA-funded M&A and lives at the intersection of acquisition entrepreneurs, partial buy-ins, and the new SOP rules rolled out in 2023.

Resources Mentioned

  • ITR Economics — Free economic updates, 2030 Great Depression methodology, and Trends Talk podcast. — itreconomics.com
  • Prosperity in the Age of Decline by Brian and Alan Beaulieu — Playbook for navigating between now and 2030.
  • Make Your Move by Brian and Alan Beaulieu — Tactical guidance on using leading indicators and business cycle phases.
  • Ray Dalio — Principles for Dealing with the Changing World Order — Referenced as the macro theory companion to ITR’s tactical work.
  • Butcher Joseph & Co. — Investment bank, M&A advisory, and ESOP transactions.
  • Live Oak Bank — #1 SBA lender in the country by dollar volume.
  • John Thwig contact — john.twing at liveoak.bank, or search “SBA guy” on Google/LinkedIn.
  • Dave Ramsey viral clip — Referenced re: the couple nearly $1M in debt at age 31.

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