Let's Make A Deal | Tight lending market reintroduces business brokers to seller financing
Photo/Edd Cote
Navin Wadhwani, owner of Gibbons Wine & Spirits in Worcester, says excellent credit helped him buy his first business in a tight market
Business brokers from around Central Massachusetts say sellers are being pushed into financing the sale of their own businesses by the death of the secondary market for U.S. Small Business Administration loans.
With that change comes increased risk for sellers, an increased reliance on cash deals and a lot of business brokers waiting for recently laid-off corporate employees to decide to buy themselves their next job.
So far, only the increased risk is materializing.
“More sellers are reluctantly doing seller financing, where there’s the risk that the buyer might not run the business as well as they did, might not be successful and might never pay,” said Bradley Field, president of the New England Business Brokers Association, owner of the Business World brokerage and resident of Auburn.
Harry Mink, managing partner of Alpha Business Group in Acton said seller financing is more than a trend, it’s almost unavoidable.
“I sold a business in November and one in December; what we would call Main Street businesses — a beauty salon and a flower shop — and there was no third-party financing available, so the seller financed. (Seller financing) is not highly unusual, but there were no options. That was it.”
Welcome Back
According to Christopher George, president of George & Co. in Worcester, a typical seller-financed deal includes a larger down payment than a bank-financed deal, a relatively low interest rate and perhaps quarterly payments.
George said the banks that specialize in SBA-guaranteed loans, like CIT and UPS Capital, have not been able to sell those loans on the secondary market since the practice caught attention as part of the subprime home mortgage meltdown and even though the portions of those business loans sold on the secondary market were 100 percent guaranteed by the SBA.
As of August, the SBA also no longer allows lenders to make business loans using intangible assets like goodwill as collateral.
The reemergence of seller financing has George saying, “Welcome back the ‘80s,” when sky-high interest rates drove a large number of deals down that route. “And unless the buyer has a great relationship with your bank, you’re probably not going to get financing,” he said.
Unlike past recessions, the current economic calamity isn’t providing business brokers and their clients with an opportunity they’ve come to count on.
“What we’re not seeing, is typically when we see layoffs from corporate America, people that get laid off say, ‘I’m never going to get another pink slip. I’m going to buy my own business and make a go of it,’” George said. “And as part of what’s going on, that’s one thing that’s helped our industry maintain an even keel.”
Absent that, George & Co. has taken to visiting the outplacement departments at some of the area’s larger employers such as EMC, which recently announced 2,400 layoffs.
There, George discusses what it takes to buy, open and operate one’s own business. And with dwindling financing options, George is advising those with the wherewithal to use retirement accounts like 401(k) and IRAs as leverage when borrowing to buy that business.
Appealing Distribution
Navin Wadhwani, the new owner of Gibbons Wine & Spirits in Worcester’s Webster Square, was an exception. He wasn’t laid off from his job as a systems engineer at Computer Associates in Framingham, but “the historical swings in my previous profession” led him to buy the 55-year-old liquor store.
With excellent credit, Wadhwani was able to get bank financing to purchase the store about six weeks ago and immediately set about making updates and improvements of the kind many new business owners should be prepared to make.
The old coolers at Gibbons weren’t able to keep beer cold, the wine racks were old and worn, the wine selection tentatively held up by those old racks was small and the store’s exterior sign still doesn’t light up.
Gibbons now shows the signs of new life. There are new, wooden wine racks, new coolers and plans for a number of further improvements.
Business ownership wasn’t completely foreign to Wadhwani. His parents owned a convenience store in New Jersey when he was a child. But he’s never owned his own business.
A liquor store is really “an appealing distribution center,” Wadhwani said. “Instead of opening a restaurant, a package or a bottle of wine is the same everywhere.”
But the difficult financing environment and laid-off corporate employees slow to take the plunge haven’t dried up the business brokerage business completely. Both George and Mink said business appraisals are in high demand and George said recent immigrants with cash in hand are more than willing to try for the American dream.
“Buyers with cash want liquor stores and convenience stores,” George said.
These days, those buyers tend to have recently arrived in the U.S., or have been here for just one generation and haven’t depended on the stock market to make money. They’re looking to buy businesses with asking prices around $2 million, a segment brokers define as “lower-middle market.”
“The lower middle market is red hot,” George said. “Manufacturing, if it’s got the word ‘medical’ on it, it’s hot, home health care, anything that’s medical-related and related to (baby) boomers is hot. Manufacturers with consumable, proprietary products are hot. Distribution is hot, business-to-business services like medical billing is hot.”
But prospective buyers must keep their fingers on the pulse of the economy, George said. While liquor stores, convenience stores and others are hot, “big box stores are killing small retailers,” with the exception of barber shops, he said.
WBJ Web Partners
Most Recent
Most Recent
0 Comments