With the economy experiencing slow but steady growth, why is the business-for-sale marketplace still sluggish?
It’s common knowledge that the economic downturn had a negative impact on the rate of transactions in the business-for-sale marketplace. Many buyers were either unable or unwilling to plunge into a new business during the recession and decided to delay their purchase plans until the economy began to show signs of recovery.
But now that the economy appears to be experiencing steady (albeit slow) growth, the question on everyone’s minds is why aren’t more small businesses changing hands? If the economy has turned the corner, shouldn’t more buyers be pulling the trigger on their plans to acquire small businesses?
Obstacles to Business Succession
During the recession, economists and government officials were quick to tout small businesses as the key to sustained economic recovery. However, a lack of access to capital for business acquisitions has continued to strangle the marketplace, limiting buyers’ ability to consummate transactions and successfully transition to small business ownership.
In a recent survey by BizBuySell.com of 260 business brokers from around the country, 70 percent indicated that financing for business acquisitions has not improved since 2011–a figure that is unchanged from the previous year when the same percentage of brokers indicated that financing had not improved since 2010.
According to the survey, the primary culprits behind today’s borrowing challenges are commercial loan restrictions. A majority of brokers indicate that banks have made the loan process even more difficult in 2012, causing many potential buyers to simply walk away from the marketplace due to lack of financing.
Borrowing is particularly difficult for new or young entrepreneurs. Financial institutions want small business borrowers to have a track record of success in order to receive financing for a business acquisition, a requirement that prevents many newcomers from raising enough capital to enter the arena of small business ownership.
In addition to lending restrictions the other elephant in the room for potential buyers is lingering economic uncertainty, including concerns about the “fiscal cliff.” When asked to identify the issue that presents the biggest threat to economic recovery, 31 percent of brokers pointed to the U.S. national debt and political deadlock regarding the fiscal cliff. Other concerns cited by brokers included long-term unemployment (22%) and small business/personal tax rates (14%).
Tips for Sellers
Business sellers have little control over legislators’ ability to resolve the fiscal cliff and improve the U.S. economic outlook. But there are several steps they can take to make their businesses more attractive to potential buyers, starting with seller financing.
Seller financing is not necessarily the right strategy for all business succession scenarios. But under the right circumstances, a seller’s willingness to finance a portion of the sale can dramatically increase the number of potential buyers and create more advantageous sales terms (e.g. a higher sale price).
Approximately 50 percent of brokers surveyed identified seller financing as “essential” in speeding up the business sale process; an additional 40 percent listed seller financing as “important.” Although business owners should carefully screen potential buyers’ credit histories, seller financing is typically less stringent than commercial lending, equipping buyers with the capital they need to complete purchase transactions.
With fewer capitalized buyers in the current marketplace, sellers also need to plan for the sale and make their businesses as attractive as possible to buyers. By a margin of nearly two-to-one, brokers expect the business-for-sale market to improve at least slightly in 2013. But the sellers who are most likely to experience success in the near term are the ones who plan ahead and consider including the possibility of seller financing in their sale strategy.