This looks like another tough year for business owners looking to sell their business – and for those looking to buy them
In a recent survey of business brokers by BizBuySell.com, nearly 70 percent reported that the availability of financing hasn’t gotten any better since last year. That was virtually the same percentage as last year’s survey about change from 2010.
Financing remains challenging, agree local business brokers, but they say that’s not necessarily all bad. Tighter lending standards mean that the only deals that get financed are strong ones likely to survive the transition to new ownership. But it also means lots of business owners are having to run their business longer than they would like.
Compared to 2007 or 2008, banks are asking for stronger cash flow in the target business, more equity and more collateral from the buyer, and more experience by the prospective management team.
Lenders have pulled back at the exact time that many business owners want to sell.
“When your sales are down, earnings standpoint, you’re not as attractive,” said Steve Fischer, owner of VR Business Brokers.
Big vs. small
Smaller deals, less than $2 million or $3 million, appear to run into more financing roadblocks than big ones, say local brokers.
The brokers in the BizBuySell.com survey had average sales of $350,000, said company general manager Curtis Kroeker.
Lower sales generally mean an individual buyer and bank financing. Most of the time, according to the BizBuySell.com, banks won’t lend enough to close the deal. Nearly all sellers are having to “self-finance,” that is, be paid any shortfall over time.
In these deals, it’s a buyer’s market – assuming the buyer can qualify, Fischer said.
“It’s very frustrating,” he said. “Buyers are as cautious as they’ve ever been,” he said.
But Brent Bressler, owner of Bressler Ventures, said he senses a very slight thawing from lenders.
A bank recently financed the sale of a local equipment rental company that it might not have last year.
“What saved the buyer was that he was in a similar business, so the bank felt it was a less risky deal,” Bressler said.
Bigger is better
On the other hand, many bigger deals are getting closer but more positive looks, say brokers who work in that segment.
Gary Gibbs, executive vice president of Allen, Gibbs and Houlik, said that private equity funds have grown aggressive in buying companies as small as $5 million.
But their arrival poses a challenge to the sellers. These private equity buyers are pros, and want to understand all of the key aspects: the financial, the management, the market.
He said they’ll spend $1.5 million on due diligence for a $30 million purchase – and aren’t afraid to walk away if it doesn’t meet their criteria.
It used to be that buyers typically came from within the same industry, called strategic buyers, looking to bolt the new business onto their existing business. They made their money by cutting overlapping functions.
But too many of these mergers failed, and with a sluggish economy fewer such strategic mergers are taking place, Gibbs said.
Private equity buyers are now outclassing same-industry buyers with their deep due diligence and long rosters of executive talent waiting in the wings.
The upshot, Gibbs said, is that sellers with good companies can demand a premium, while those that are struggling aren’t finding buyers.
Private equity has gotten more acquisitive in recent years as vast amounts of money have flowed into the funds seeking higher returns than is available on the stock market, said Pat Finn, managing director of Vercor, which handles larger sales.
Those funds must either invest the hundreds of millions of dollars or lose the commitments, he said.
“They are feeling pressure to do deals,” Finn said.