A recent survey (September 2008) conducted by businessforsale.com - a leading international listing site - revealed the following about the current economic situation and its impact on business brokerage.
Seller financing is not the only issue to have come out of the economic slowdown. Brokers reported the following common issues:
- Sales are harder to complete when there is no real estate attached to the business.
- There are more corporate buyers investing in smaller businesses.
- Buyers are using lack of financing as an excuse to make lower offers.
- There is a lot more caution in the marketplace.
- Sellers have nowhere to re-invest the money from a sale.
- It's generally harder to find financing, particularly to get an SBA loan. Application processes are longer and credit is tightened.
- Smaller deals are not completing.
Overall Market Activity
Businesses are still being sold; however, 50% of brokers beliwve the process is taking longer than it did last year. On average it takes 12 months for a buyer to be found and a deal to complete - 3 months longer than this time last year. 12.7% of brokers believe there has been no change in the length of the business sales cycle.
Comment:In addition, at the recent International Business Brokers Association conference, we heard quite a few stories of deals that fell apart primarily due to financing. The loans couldn't be obtained, the business didn't pass muster with the bank, or the bank just plain wouldn't even consider the loan. Most of these were SBA loans. On the flip side, quite a few attendees said they were making deals, especially on smaller businesses.
Some of the common issues listed above are fairly obvious, but others deserve some discussion. We suspect that the deals with real estate involved are easier to get financed than those without it. Real estate always has intrinsic value, so banks and SBA (7a) loans are much easier to obtain with real estate included as security.
We also think that corporate buyers (by this we mean buyers who worked in the corporate world who we assume have been let go) are looking at smaller or less expensive businesses because they can't get home equity loans or they can't get them for nearly as much as they had hoped. This is then coupled with the lack of available financing mentioned previously.
We find it interesting that buyers are making lower offers using the lack of financing as an excuse. We would have thought that the opposite would happen. Sellers generally look for a higher price if they are financing the sale. Outside financing usually results in an all-cash sale or pretty close to it. Cash generally commands a lower price than one that is seller financed. As an aside, we feel that the current economic situation will create a lot of first-time buyers due to the layoffs and downsizing being done by corporate America.
Today's buyer is probably a lot more cautious due to the current economic times. Money is tight and there is a lack of available financing, forcing buyers to use their own capital or what they can borrow on their home equity. Since the majority of them are first-timers, they are cautious - and scared. Business brokers have to take this into consideration when working with them.
Now, more than ever, there is no such thing as too much information. Not only as much financial data as possible is necessary, but seller training, operations manuals, key employees who will stay, and seller financing are critical. Remember, seller financing is also a big confidence builder. Buyers feel that if the seller is financing the sale, he or she must be confident that the business can afford the payments, but also provide a livelihood for a buyer. It's alos importnant the landlord is agreeable to the sale; that a franchisor is reasonable about transferring the franchise to a new buyer, etc. In other words, the preparation is all important. A snag, such as an uncooperative seller, landlord, or note holder, can scare off a first-time buyer who is already petrified about depending on a small business to support his or her family.
It is also very important that we brokers well the small business lifestyle; the fact that an owner can't be fired, there is always cash flow, and that most businesses have a great upside with new management. Numbers are important, but lifestyle and owning your own business are key selling points today!
Smaller deals are probably not closing because the buyer is afraid to make the leap of faith necessary to become a small business owner. In today's environment, business brokers must spend time with a buyer and delve into whether he or she has what it takes to make that leap of faith. Sellers also have to be educated on how serious they are about selling. Many sellers back out of a sale when it dawns on them that they now not only won't have anything to do, but they won't have an income - unless they are providing seller financing. There is a very old and trite adage: A successful sale of a business requires a willing seller and a willing buyer. That is more necessary today than ever.
