A belated Happy Father's Day to all who celebrated last weekend. I had a brilliant day, and I just love it one when of my children asks "How come there in no Kid's Day'" to which every parent in the world naturally replies "Everyday is kid's day"...know the routine?
The folks at BizQuest and I put together a series of surveys for brokers, buyers and sellers. The first one (for brokers) has been completed, which I will discuss in a moment. For all you buyers, over the next two weeks you will be receiving an email to complete a brief survey, and your participation will be a huge help to everyone in the industry. Plus, it will give you an opportunity to collectively air your concerns and challenges so please take a moment to complete it.
First, on behalf of the staff at BizQuest, I truly want to thank every broker who participated - your input is not only greatly appreciated, but it is a tremendous help to the all stakeholders in the business for sale community.
There were 416 broker respondents, which is an excellent sample size. I am not sophisticated enough to say it is accurate within x percentage points like those fancy political polls. By the way, how do they ever determine those polls of 1,000 people to be accurate within a few points of what 300 million people believe? I guess it is another political mystery. Anyhow, I want to point out a few highlights from the business broker survey, and there will be a link at the end so you can review all the questions, answers and percentages.
Just under 60% of the respondents indicated being brokers for more than seven years, so we are dealing with an experienced group. This statistic alone heavily validates the results.
A question was asked whether business valuations are increasing, decreasing, or stable. I have seen the biggest recent change more in deal terms however, the results from the survey were staggering - 69.2% indicated that valuations are decreasing. While this is not surprising in a down economy, it represents a huge opportunity for buyers.
We asked for input on SBA loans. I have always felt strongly that the impact of the SBA program is grossly exaggerated in small business sales and has nowhere near the impact that it could have, nor is it anywhere near what some in the industry claim it to be. So this was one questions where I am glad I can now add an "I told you so". The brokers surveyed indicated that less than 10% of their past deals have involved SBA financing.
There are two clear conclusions from this data: First, despite all the incredibly hard work the business brokerage community has done lobbying the government to amend the current loan criteria to prior terms, perhaps it is an effort that simply will not yield the results they want, even if the criteria is changed. A better tactic I believe would be a complete overhaul of the SBA 7(a) loan terms in order to have a more meaningful impact on small business sales. Even if the government retreats to its prior conditions, so what? While it will help get some mid-range deals done, it seems to me to be a whole lot of activity for less than ten percent of the deals. Second point is that buyers can be extremely firm in negotiating seller financing, because regardless of what the other side conveys, very few deals are going to get done with SBA lenders.
On the note of seller financing, the data is abundantly clear - sellers have financed over 51% of the purchase price in more than 40% of the past deals of the broker respondents. No surprise to me, but very much in contrast to the craziness I hear from the seller side at times when they claim "we don't do seller financing", or "we want an all cash-deal".
The final question I want to discuss was the answer to what percentage of the buyers do brokers feel are either "well prepared" or "poorly prepared". Based on some of the great debate and comments this blog has experienced between brokers and buyers, I guess it is no surprise that 76.8% felt buyers were "poorly prepared" and I categorically agree with this result. In fact, I would not have been surprised if it was over 90%. There is a very clear message here to any prospective business buyer - when you contact a broker, if you can demonstrate that you are well prepared and knowledgeable, you are going to go to the front of the line for the best listings. I have been saying this for two decades, and it is the entire philosophy behind my whole business. But of course, there are still going to be those folks who believe they're smart enough to guess their way ahead, and so the dismal statistic that only one in ten people who begins to look for a business ever completes a deal will likely continue until the collective buyer community wakes up and educates themselves before they start their search.
Buyers: Remember to respond to the survey you will be receiving - it shall make for a very interesting counter commentary to the findings in the broker survey. If you want to become a well-prepared buyer, start with reviewing the information on my website at www.diomo.com - read the articles, and ask-the-expert sections, and get a copy of my guide.
To review the complete business broker survey, please click here
Have a great week.
Richard:
First, thanks for your kind words of a couple of weeks ago. Several of my Associates asked what it cost me!
I tried to respond to your discussion of buyer brokerage and better structure of our business, but both long responses I drafted got lost in the "ethernet" when I tried to send them while I was in Atlanta at the IBBA Conference. I just got home yesterday.
Thanks for the survey results, and I look forward to the buyers survey. The first question answered by brokers reinforces my observations of the IBBA Conference attendance and discussions, the old timers with staying power are still around.
And of course the optimism shown in the answer to the second question is pretty mild, but reflects the fact that if you don't believe it will get better then you better find something else to be doing!
I guess your focus on the buyers for a couple of blogs, and my response which you really didn't get, sensitized me to the discussions at the conference about how we deal with buyers. It seems to me that there were a lot more brokers taking the problem of educating buyers seriously. I heard a lot more talk, both in workshops and in informal discussions, about paying more attention to customers who might become buyers. The comments went from people talking about better communications and tracking systems to representing buyers.
Several brokers who have not worked as buyers brokers in the past are willing to now, as long as it is under the kind of conditions that I mentioned before. The customers have to convince us that they are real buyers. One very successful senior broker said that she now represents several buyers. Interestingly enough she does not want retainers from them, because she wants to be free to "fire" them if they turn out to not be serious. I guess I still prefer seeing some money up front to convince me they are serious.
Keep up the good work.
Leon
Posted by: Leon Parker | June 23, 2009 at 11:36 AM
Will you be anonymously sharing any of the comments you received on the recent Business Broker Survey?
Posted by: Sue | June 23, 2009 at 11:45 AM
The reason the SBA numbers are low is because they aren't lending the way they did in the past. They have changed the good will allotment and have tighten credit. You can not draw any meaningful information about the role of the SBA in our business from the way you asked the questions. Go back to 2007 or 2006 and you will get a much different response. Sellers are extending credit to buyers because the HAVE TO in order get a deal done. Valuations are down because sellers would rather hold on to their business than extend credit. " If I wanted a financial stake in this business I wouldn't sell it." Notes backed by personal real estate are very difficult to collect and all intellegent sellers know that. Your survey was far to unsophisticated to have any real value.
Posted by: John Jacobson | June 23, 2009 at 11:57 AM
Richard-- Thank you for the interesting results. I do not think I was part of your survey. I have learned over many years in this business that it is a diverse industry. Many of us have different markets and varying experiences.
I have to tell you that in the last 12-13 years, SBA 7 (a) loans have provided the majority of financing for ALL of my business (non-real estate based) deals over $1 Mill in price, and about 70% of all the deals we do each year in my brokerage. This is still the only option for third party financing for non-collateralized goodwill deals for larger service, distribution, light fabrications businesses. Any changes we can get in the SBA loan programs and lender co-operation will impact us VERY significantly.
On buyer preparation. . . I know many brokers only deal with sellers. If a buyer is not a perfect fit for a listing, "off with his head." We do about 50% of our transactions representing buyers VS sellers. I believe that it is our JOB to work with these buyers, get them educated on the process, the financing options, and anything else they need to become successful (esp. first time) business owners. Of course, we help them to successfully negotiate and navigate the unknown course of a complex business deal. In many ways, I would prefer that they not go out and try to educate themselves with the WRONG information that they acquire from their well-meaning friends and associates, so that we have to "unlearn them" when we start working together. We are the experts in business sales, after all. The time is takes to cultivate buyer loyalty through education often pays off handsomely in more referrals and repeat buyers. There is considerable value to an excellent buyer agent in business brokerage.
Thank you for sharing your survey results!
Posted by: Kathryne Pusch, Pres & Broker ConsultKAP, Inc. | June 23, 2009 at 12:01 PM
Sorry- re-reading what I wrote, I have a correction. Corporate acquisitions and PEG deals are clearly "excluded" from the discussion of buyers' financing and education. . . so they are not included in my statement about "all" deals over $1 Mill in price.
Posted by: Kathryne Pusch, Pres & Broker ConsultKAP, Inc. | June 23, 2009 at 12:04 PM
FYI
In regards to the broker survey, I have been a main street broker for over 20 years and the SBA 50% goodwill has effected my practice in a huge way. I have had 3 seller financed deals that I used not do, go bad in the first year and I cannot get paid. Yes I know get paid up front, lots of luck when there is not much down payment. So I disagree as to the SBA comments, getting paid on a cash deal with SBA is the best way to go!!!
Posted by: Jeff Guinn | June 23, 2009 at 12:24 PM
I have been in the business 41 years, and the only SBA closing I had was about 20 years ago. I have, however, wasted a lot of my and my clients' time attempting them. I won't be trying again unless the deal is over 1 Million. Until 6 years ago, I had only closed 5 cash deals, but now 1/2 of my sales are cash, Owner finance the other 1/2. Most of my sale values are between $100,000 and 900,000. This year is a great yeear!
David Aldridge
Posted by: David Aldridge | June 23, 2009 at 02:54 PM
FROM RICHARD: Thank you everyone for your feedback.
Leon: I am thrilled to hear there's even a bit of a shift in the thinking of how to deal with buyers from the broker community. There is no doubt that drilling down to the truly qualified buyers is the key. As usual, your comments are right on point and extremely valuable.
Sue: Great suggestion! We are going to compile all of the comments. We need to edit out some of the personal information so I would expect we'll have something next week.
Mr. Jacobson: I completely disagree with your assessment of our survey. 416 respondents is a very applicable and representative sampling. Second, in 2005/2006/2007, SBA financing was involved in less than 6% of all business brokered deals and so your facts are simply not correct. Your own experience does not reflect the national averages. Regarding our questions, 3 of them requested information from past experiences. I would hardly label this survey as being data skewed to the past. AS I was reading your comments, I was hoping your were going to suggest some future questions as opposed to just pointing out all of the alleged flaws you think we had in our questionnaire. And so, I would welcome your suggestions of questions for any future surveys.
Kathryne: Wonderful insight - thank you. Your approach with buyers sounds brilliant, and probably why you do so many larger deals compared to the average broker. I just love your statement about having to "unlearn" the buyers. As someone who has dedicated a career to educating buyers, I know precisely what you mean.
David: How wonderful it is to hear someone thriving in the current climate. Well done. I have closed a number of deals involving SBA financing and they certainly don't make it easy. In the past few years, in my work as a broker, my average deal size was $2.1 million and thankfully only two of the deals involved SBA financing. In my experience, unless all the stars align, they're a huge pain in the rear-end. And that is precisely the point of my comments. If the SBA 7(a) program was truly "deal-friendly", it would have a monumental impact on this industry but so far, not only is is not having a significant impact on the numbers of deals getting done, it's getting worse.
Have a great week everyone!
Posted by: Richard Parker | June 23, 2009 at 08:43 PM
I strongly disagree with your comments about seller carried financing. It's a cop out for our industry not doing a better job of insisting on qualified buyers seeking outside capital in order to do deals. Sure, it is easier to do a deal with seller carried financing, but there is an inordinate amount of risk for a seller. The seller can sell a well operating business and a buyer can come in and make changes or mismanage the business to the point where it no longer performs and inhibits the repayment of the seller note, through no fault of the seller. When a bank provides financing they have the benefit of diversification of loans, a business seller doesn't have that diversification. The average amount of seller carried financing on my transactions is 7% - and I'm getting great prices for my clients - so the old argument that if you don't carry you won't get a good price isn't necessarily true. I'd like to encourage my fellow brokers to quit the mantra that "seller financing is a necessity" - it creates a buyer expectation that they will get seller financing regardless of whether they can do the deal using other sources of capital or not. If seller financing is necessary to get a deal done, then fine - but let's quit promoting it as if Seller Carried Financing is the deal funding option of FIRST resort.
Posted by: Eric Williams | June 24, 2009 at 10:53 AM
Speaking strictly as one central Florida Broker; I have heard from many good brokers who do not openly exhibit the habit of lying about the condition of their business that things are terrible for the following three reasons:
1. No Buyers
2. No Buyers
3. No Buyers
In the past when there was a high unemployment number, people would buy small businesses to have a job. But today these same type of buyers cannot get a loan, cannot pull any equity from their home or retirement accounts to make a down payment. These are really tough times.
Harold Hillcher
Posted by: Harold Hillcher | June 25, 2009 at 12:51 PM
I get an incomplete picture of this 'Seller Financing' the business.
'Seller Financing' has not been completely addressed in your survey. Your survey reached a 'dead end' after the transaction is completed BUT the completion of the 'real' sale does not end until the last dollar of seller financing is paid back by the buyer.
Your survey left out this question:
"Of the deals done with seller financing what percentage to your knowledge were paid back in full and on time by the buyers ? 100% ? 80-50% ? 50-30% ? Never paid ?
Posted by: Sy Sebastianelli | June 25, 2009 at 08:19 PM
Thank you for sharing this information.
Though I want to know how credible is this survery too before I jump into the feasibility aspect of buying or seling.
Posted by: Prime Commerical | August 04, 2009 at 03:05 PM