Economic Impact on Business Brokerage

The following article was published by Business Brokerage Press.

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.

Buyers Aplenty for Businesses on the Market

The following is from The Keene Sentinel
By Anika Clark
Sentinel Staff
Published:
Saturday, November 22, 2008

The national news is filled with stories about businessess - and the people who man them - drowning in a choppy economy.

With all this activity, business brokerage firms report they're comfortably above water. But some say the strength of their sector isn't the result of more people wanting to jump from the self-employment-ship so much as a swell of people looking to climb aboard.

"This has been actually one of our best years." said Brattleboro-based Philip H. Steckler 3rd, vice president of the New England firm Country Business Inc. "Every good business, viable business, that I've had out of here, we've sold."

Richard H. Thackston 3rd, president of Keene-based Century 21 Thackston & Co., echoed him.
"Business brokerage has been pretty good...in the last six months," Thackston said. "Sometimes when people see that their middle management job, or whatever, is likely to go away, they typically start thinking about what else they can do."

"Where regular employment goes away." he added, "people look for other, more creative , ways to earn a living."

Pamela J. Lynch, vice-president of Leonard Lee & Co. - an Amherst commercial real estate and business brokerage company that covers Southern New Hampshire - similarly described how that sector can be stimulated by a floundering economy.

"I think it's driving business more," she said. " There's more buyers looking to buy businesses."
Basically, she said, many people are looking to "buy themselves a job."
And with recent announcements of massive upcoming layoffs at firms such as Fidelity Investments, which employs New Hampshire workers at its Merrimack location, she said this trend's going to continue.

"A lot of those people are going to be thinking about buying a business and we've already been contacted by some," she said, referring generally to people emerging from corporate layoffs.
Also starting to notice an uptick in people interested in business ownership is Gary W. Oden, who works with prospective and veteran business owners alike as regional manager for the Keene branch of the N.H. Small Business Development Center.

Oden's encountered newbie business owners entering everything from the baking to pet grooming fields, and he said he had one client who saw entrepeneurial opportunity in converting trucks into hybrids.

Still, he said, he generally sees a rise in people looking to be the masters of their own business destinies between summer and fall - in part, he explained, because of psychological tendency to view September as a "new beginning" - and said this season's uptick doesn't seem too much greater than any other autumn.

"We're seeing a bit of an increase in activity, but I can't attribute it necessarily to the economy," he said. "I would have thought that if it was really the economy, you would have seen a tripling of the calls to come in, and we're certainly not seeing that."

Regardless, Keene residential and commercial real estate broker Moe Mozier of Re/Max Town & Country, said his work as a business broker has been "fairly active" even as residential real estate has "slowed considerably."

"Most of everything I've done in the last two or three months has been commercial," said Mozier, who said he's already seen the bad economy act as a catalyst for new business ownership and expects this to continue.

Specifically, Mozier predicted career-changers will be drawn to his bread-and-butter sector- the notoriously risky realm of restaurants- because of a lifelong dream or the assumption that owning an eatery doesn't require the same level of education as being a plumber, electrician, lawyer or doctor.

Everyone tends to think they can run a restaurant, he explained, and new owners often hire staff who know more about the field than they do.

The result?

"The tail wags the dog," he said, "and they're out of business."
But when novice restauranteurs are out of business, Mozier's in, since he works on behalf of both buyers and sellers. While Mozier said it's too early to notice any trend in his own business, he said that given the challenges facing restaurants in today's economy, "There's no question, there's downturn....There'll be more on the market."

Lynch, of Leonard Lee & Co. specializes in selling smaller "mom and pop" businesses ranging from hair salons to convenience stores. She also sells the assets of closed companies, including restaurants, where the assets can represent greater value.

"There's always restaurants that fail and close down for one reason or another," she said. "I can't say that there's an increase in them," she said.

But the future, she predicted, will be a different story.

"I think we'll see more restaurants probably coming on the market as assets," she said. "When the economy was hot here...some things were overdone. There were probably too many restaurants- too many pizza places- that were opened in certain areas. There's just too much competition."

Meanwhile, she said, businesses that are staying afloat are opening additional locations.
With commercial real estate prices coming down in recent years, she explained, "It is a good time for them to expand because they can get into a different market at a lower cost."

Donald F. Giancola, executive vice-president of Country Business Inc. - which provides business brokering through its Portland office to Maine, the New Hampshire Seacoast and Route 93 corridor- said he's seeing more acquisitions of smaller companies.

Giancola, who said his office's usual load of 15 completed transactions annually has remained stable, cited the economy as one possible reason he's seeing this trend.

"If a company's having a difficult time growing because it's in a market area that has not done well, then it's easire to grow through acquisition," he said. "They can either expand geographically, or they're expanding through a product line extension."

Like Giancola, Steckler said his rate of completed transactions has stayed steady during the trying economic times.But, he said, he's having to work harder to find for-sale businesses that meet his company's success standards to take on as clients.

"What concerns us as a company," he said, "is if we're not seeing any product for sale, or very little product for sale, what happens next year?"

Still, Steckler was one of several brokers who said their sector is afforded stability since some of the key factors that lead people sell their businesses- such as boredom, burnout, divorce, retirement- remain fairly constant through financial highs and lows.

"Frankly, I think that you're going to have an opportunity over the next few years for buyers and sellers simply because so many business owners are baby boomers," according to Steckler.
"There are a lot of businesses out there. This economy may weed some of those out...but the criteria that makes people want to sell is still there," he said. "You're not going to live forever, and you're not going to own your business forever."

Should You Be Selling Your Company...Now?

The following is an excerpt from our Privately Held Company Newsletter.

It all depends! There are all sorts of studies, surveys and the like suggesting that with the "baby-boomers" reaching retirement age, the market will be flooded with businesses for sale. The consensus is that with these privately-held company owners nearing retirement age, the time to sell is now. In one survey, 57 percent of business owners said that their age was the motivating factor for exiting their business. In another one, 75 percent of owners with revenues between $1 million and $150 million stated that they looked to sell within the next three years. Reading all of this information, one gets the feeling that over the next few years almost every privately-held business will be on the market.

While there are always going to be those who feel that Armageddon is coming, or that all of these companies are going to be on the market on the day that baby-boomer owners hit 65, there are some compelling reasons to sell your business now - and some reasons that may compel you to hold off. First, we'll address the reasons to sell now. Under the Bush administration , the capital gains tax rate was reduced from 29 percent to 15 percent - almost cut in half. That is a pretty significant reduction. However, there is the distinct possibility that a new administration in 2009 will see fit to change this, and an increase is a real possibility. The tax issue is an important reason to consider packing it in now. Another good reason is that it just may be time to "smell the roses," as they say. After running the business for so many years, "burn-out" is a very valid reason for selling. Many business owners may have, without actually realizing it, let their business slide a bit. You lose a customer or client here and there and don't make the effort to replace them. Or, you don't make the effort to check back with the supplier who has promised to give you a better price on an important product or service. It's too easy to stick with the one you have been dealing with for years, even though you know the price is probably too high.

On the flip side, it is also easy to convince yourself that the business is down a bit this year, mostly due to the current economy, likely reducing the value of the company. Maybe waiting until things pick up a bit and values increase would be agood idea. Too many business owners feel this way, but unfortunately no one can predict the future. New competitors may enter your market. Foreign competition may move in. You may not have the energy or that "fire-in-the belly" you once had, so the business may slide even further.

You could also point your finger to the tightening of credit and ask, "How is a buyer going to finance the business?" Despite very low interest rates, borrowing money has become more difficult. People seem to be pulling back a bit, so maybe no one will want to buy the business. Thirty-five percent of business owners, in another survey, said they were going to hold off selling because they felt their business would continue to grow and therefore, hopefully, also increase in value.

There is an old saying that the time to plan your exit strategy is the day you start running your business. Business owners can't outgrow interest rates, capital gains or aging. The time to sell is when you are ready to sell. There is truly no right time, but understanding the tax implications now should play a very important role in the decision if you are considering a sale in the next two or three years. The mere fact that you have read this far may be a sign that now is the time to sell. To learn more about current market trends, what your business might sell for, and what your next step might be, contact us.

Improving Your Prospects for Selling

According to a Price Waterhouse Coopers survey of more than 300 privately held U.S. businesses that have sold or transferred, the most common steps companies take to improve their prospects for a sale, prior to taking the company to market include:

• Improving profitablilty by cutting costs
• Restructuring debt
• Limiting owners' compensation
• Fully funding the company pension plan
• Seeking the advice of a consultant or intermediary
• Improving the management team
• Upgrading computer systems/process

Qualitative Factors That Impact Price

The Following is an excerpt from Arne & Co. BTM Newsletter by Darrell Arne

So, what is Price? Webster would define Price as the amount of money needed to purchase something. In the context of a business transaction, a term closely related to Price is investment value - defined as: the value to a particular investor based on individual requirements and expectations.

The definition of Price above refers to a "particular" investor (buyer), just as there will be a particular seller. The real world of business transactions involves people. People with deeply held values, differing backgrounds and knowledge, and who are emotional - just being human. That's why people are so often unpredictable.

So when buyers and sellers look at a business to be bought and sold, the Price they see will be influenced by their particular motivations, perceptions of risk and growth of the business, and their overall knowledge of the process. Price is also affected by how it's negotiated. The adage is:

"You determine Value and negotiate Price".

The test for possible overpayment begins with an analysis of the operating cash flows of the business. EBIDTA (earnings before interest, taxes, depreciation and amortization) is often the cash flow measurement from which pricing decisions are made.

If a buyer and a seller can agree tha the business produces a certain level of EBITDA, then the Price can be tested to see if it satisfies the buyer's post-transaction claimholders to EBITDA.

Those four claimholders are:

1. Uncle Sam: The state and federal income taxes on entity profits


2. Lenders: The principal and interest repayment on acquisition loans


3. Investors: The return on and of the cash equity the buyer puts in to make the acquisition


4. Company: The working capital and capital expenditures needed for future growth

If the buyer's claimholders to cash flows are not met, then the Price may be too high and/or terms too stringent. The reverse is true as well. If after meeting the buyer's claimholders' to cash flows, there are excess post-transaction cash flows remaining, then the Price may be too low, and/or the terms are too lenient. Therefore, not giving what the seller wants - the highest Price and the best terms.

Ultimately, the objective is to demonstrate that the pricing and deal structure satisfies the buyer's post-transaction claimholders to cash flows, while also satisfying the seller's expectation of receiving the highes Price and best terms.

A Win-Win Method in Negotiating Price

In the well know best seller on negotiation - Getting to Yes - the authors suggest this four-step negotiation methodology:

• Step 1-Separate the PEOPLE from the problem


• Step 2-Focus on INTERESTS, not positions


• Step 3-Invent OPTIONS for mutual gain


• Step 4-Insist on using objective CRITERIA

Ideally, the goal is to negotiate a Price that's a win-win for both the buyer and seller; and, leads to a wise agreement, which the authors define as: one which meets the legitimate interests of each side to the extent possible, resolves conflicting interests fairly, is durable, and takes community interests into account.

Top Ten Mistakes Made by Sellers

The Following is an excerpt from our Privately Held Company Newsletter:

1. Neglecting the day-to-day running of their business since it will sell tomorrow.
2. Starting off with too high a price since the price can always be reduced.
3. Assuming that confidentiality is a given.
4. Failing to plan ahead to sell/deciding to sell impulsively.
5. Expecting that the buyers will only want to see last year's P&L.
6. Negotiating with only one buyer at a time and letting any other potential buyers wait their turn.
7. Having to reduce the price because the sellers want to retire and are not willing to stay with the acquirer for any length of time.
8. Not accepting that the structure of the deal is as important as the price.
9. Trying to win every point of contention.
10. Dragging out the deal and not accepting that time is of the essence.

Finding the Deal

The Following is as excerpt from Russell Robb's book, Buying Your Own Business 2nd Edition.

Brian Knight is the president of Country Business Inc., a thirteen-office business brokerage firm that specializes in the purchase and sale of small and mid-size companies. While Country Business sells mostly businesses with sales of less than $3 million, they are considered an excellent resource for individual buyers seeking to acquire companies in the lower end of the middle market, especially in Maine, New Hampshire, and Vermont.

Knight wrote the book Buy the Right Business - At the Right Price, however, the following information was delivered to the New York Venture Group during Knight's speech on "How to Find a Business to Buy."

The demand for small businesses far exceeds the supply. Screening telephone calls from Knight's Manchester Center, Vermont office, most inquirers are looking for small medium-tech manufacturers with a proprietary product and a proven record of increasing revenues and profits. The buyers would like to move to the Stratton, Vermont area and have a relatively short commute to the target manufacturing company. The only problem is that there are very few manufacturers in Vermont, particularly in the Straton area. What is available as businesses to buy in Vermont are hospitality and retail companies. The first lesson to be learned as a buyer is not to have unrealistic expectations.

Concurrent with the first lesson is deciding whether you should buy a company at all! Buying a company, much less finding a company to buy, does not suit everyone, nor does it assure financial success. Buyers can and will succeed if they buy an excellent book on this subject, seek professional advice, and take their time (maybe two years).
Knight emphasizes that buyers should:

• Be self-analystical of their capabilities.
• Write down their acquisition criteria.
• Carefully interview and select a buying intermediary.
• Work on interpersonal skills with a potential seller.

Country Business' mission is to find good and profitable businesses, not to represent unprofitable businesses. Knight believes that the key to success in finding the right business to buy is your ability to commit to the above items. If you can do so, success in finding the deal will be more likely.