How The Bailout Impacts The Business For Sale Market

Over the past few weeks, I have heard a wide range of comments and predictions regarding the current state and future of the business for sale market. The discussions reached a frenzy with last week’s government bailout. The general consensus, not surprisingly, is that short-term, we’re in for difficult times, but there is optimism that things will ultimately turn around. Of course they will.

One thing I know that is certain: don’t count on the bailout of Wall Street to trickle down to where the banks will open their vaults for small business acquisitions simply because they have cleaned up their balance sheets. It won’t happen.

In fact, lending criteria is going to be more rigid now, not the reverse.

Personally, I think that the carnage in the credit markets will prove to be the best thing to ever happen to the buying and selling of small businesses because seller financed deals will be the only way to get most deals done.

I have been preaching and teaching seller financed deals for nearly twenty years; now, there is no choice. However, all stakeholders in this industry, and specifically sellers and brokers, have to adjust their thinking. Setting realistic expectations in deal terms with sellers is more important now than ever.

From a buyer’s perspective, no matter what you may be told by the sell side, you have to pursue seller financing because your options for other sources are negligible. Plus, the pool of business buyers who can potentially pay all-cash has almost evaporated.

While there is a long standing belief that time kills all deals, it may now have the opposite effect in some cases. Sellers may need to “play the market” a bit, but once they realize that deal terms will not materialize as they had originally expected, they will come around if they truly wish to sell their businesses. 

I learned a long time ago that the only thing you can predict in business is the unpredictability of it. To me, it makes being in business all the more exhilarating. Others can be crushed by the uncertainty. The financial upheaval has been a good lesson that there can always be something lurking around the corner with any business. Being prepared, and equipped with the right knowledge, is the only mechanism a buyer has to identify potential issues in a business. It is also the only way that a buyer can get to the finish line.

Education is always the first step on the road to success, and that holds true now more than ever.

Well-informed, properly prepared and knowledgable buyers always find tremendous opportunities, regardless of the marketplace. Make sure you're one of them.

This year, and especially the events of the past few weeks, has been quite stressful for many. You can make yourself completely crazy trying to guess how things will unfold.

I believe it is healthy in these times to take a philosophical approach to the future. With all of the predictions being tossed around the media and this market, I thought it would be appropriate to tell the Taoist story of an old farmer who had worked his crops for many years. One day his horse ran away. Upon hearing the news, his neighbors came to visit.

"Such bad luck," they said sympathetically.

"We'll see," the farmer replied.

The next morning the horse returned, bringing with it three other wild horses.

"How wonderful," the neighbors exclaimed.

"We'll see," replied the old man.

The following day, his son tried to ride one of the untamed horses, was thrown, and broke his leg. The neighbors again came to offer their sympathy on his misfortune.

"We'll see," answered the farmer.

The day after, military officials came to the village to draft young men into the army. Seeing that the son's leg was broken, they passed him by. The neighbors congratulated the farmer on how well things had turned out.

"We'll see" said the farmer.

Comments

[Scott Huber]

As someone who has had hopes of owning his own business for the last few years, and who has seen with the economic downturns of the past year, the funds I had hoped to use as a downpayment on a business evaporate, I would love to see a greater number of sellers finance the sale of their businesses. In one of your prior commentaries you had stated that having the seller finance the purchase of the business, if possible, shows that they have confidence in the business, and demonstrates that in the proper hands, the business will continue to grow and prosper. That fact carries even more weight now that credit for those of us looking to buy a small business, unless we have a large amount of money to put down, has in all likelyhood disappeared. If a seller is truly interested in selling their business in this economic climate they are going to have to, as you said, be open to the possibility of self financing, as are the brokers representing them. As someone with good credit, but limited funds, this could open up a lot of doors for those of us who are serious about buying. I just hope that more sellers become serious about selling.

[jbutler]

Seller financed deals are great but are you aware that if a problem comes up later for the new owner, the SEC can completely unwind the deal and the new owner can get back triple damages. Be careful with this.

[Richard]

Comment from Richard: I appreciate the comment from "JButler" regarding seller financing. Although I have never, ever seen their point transpire in reality, I did put the comment out to a number of people in the industry. Following is undoubtedly the best feedback that I received from an individual who has been involved in the industry for over 25 years:

"While there is some small minority of regulators that would make the case a seller's note is a form of security, I would say that the majority of regulators would laugh out loud at the thought. I also would argue that the remedy of reversing such a deal per SEC (or state) laws it is not very practical.

I would fathom the SEC is pretty busy right now trying to deal with the current economic crisis and wants to implement controls and seek punishment of those who got us in this mess.

I highly doubt (and would bet my house on it) that you would ever see any push toward a regulatory body (state or federal) getting involved in an asset sale of a small (microscopic) business that involved a seller's note.

Public companies that have a market capitalization of less than $50M are considered Nano cap and those companies are barely on the SEC and state regulators radar these days.

It would be extremely hard to believe they care to try to regulate a RE broker (or seller) who sold Joe's Deli for 200K with 120K down, and 80K sellers note.

Now, there are conversations going on at high levels concerning M&A licensing and what activities would be someday regulated. Be assured there are many watching these talks and will help form future regulations and licensing guidelines. Until such time, sleep (and sell) well my fellow brokers (and seller's) of small businesses."

[website businesses]

I fully agree with your analysis and have been consulting with my clients that they will need to consider offering owner financing to improve the likelyhood of closing deals in this climate and getting desent multiples for their website business. Ultimately, all cash offers are dropping to lower multiples of EBITA, but sellers opening up to more significant owner financing allows for more reasonable multiples to be offered on the net profits. In fact, the owner paper carried can be sold within 3-6 months and certainly within a year in the secondary market at about 10-15% of value if the seller wants to cash out earlier. The real upside is the deal does'nt take 3 months to close because of the bank loan processing time and scrutiny.
David Fairley
websiteproperties.com