Pittsburgh Post-Gazette – Business
Despite stagnant economy, local businesses are still changing hands
Wednesday, March 25, 2009
By Elwin Green, Pittsburgh Post-Gazette
The recession is creating opportunities for both buyers and sellers of small businesses, according to local consultants, but both sides may have to adapt if sales of businesses are going to go through.
Successive rounds of mass layoffs nationwide have swelled the ranks of potential buyers, said Christine Hughes, training manager at Duquesne University’s Small Business Development Center. “Some of those are qualified business executives,” she said, who possess not only managerial experience but the finances and the collateral to make them good candidates for buying a business.
Many people who consider going into business look first at the possibility of buying a franchise.
Scott D. Mashuda, managing director of business brokerage River’s Edge Alliance, said that might be the best route for some. “If you’re good at one thing, at accounting or at marketing, a franchise system might be best for you,” he said. That buys a system that fills in an owner’s weak spots. But, he cautioned, “You’re giving up some level of control … you still in some respects work for somebody else because you’re still being told to some extent what to do.” For those who want a greater measure of independence and control, he said, a standalone company would be a better fit and the supply of those is increasing. “There are a lot of companies out there that are in breach of their debt covenants right now,” he said. “Those companies are being forced to sell when they normally wouldn’t sell … the banks are calling the loans. They have no other choice but to sell the business.”
For buyers who choose to buy a standalone business, “The first thing you have to ask is, ‘Why is the business owner selling the business?'” said Ray Vargo, director of the University of Pittsburgh’s Small Business Development Center. The buyer’s due diligence should ensure the business does not have problems that will be beyond the buyer’s capacity to fix. Also, Mr. Vargo suggested a trial run if possible, working the business to make sure it’s a good fit, not only financially, but emotionally. “It may look great on paper, but the day you walk in the door, you say, ‘What did I get myself into?'” he said.
Ms. Hughes offered similar counsel. “The one thing we look at is, what’s your experience?” she said. “Just because you like pizza doesn’t mean you should own a pizza business.” She also cautioned that buyers must guard against making an emotional decision. “Look at it logically: does it make sense?”
The typical seller, Mr. Mashuda said, is “an aging baby boomer who thought their son or daughter would be their exit to the business, and son or daughter went away to college, got a law degree or something like that.” Even in a good economy, that failed succession plan creates pressure to sell a business. In today’s credit-squeezed economy, Mr. Mashuda said, many owners not only need to sell but may find they have to give their buyers some help in buying. “Sellers almost have to finance some portion of the deal at this point in time,” he said.
Mr. Vargo agreed, saying that banks are more open to funding an acquisition if the seller still has a higher portion at risk. A buyer should be prepared to put up his or her own money for 20 percent of the sale price, he said. Beyond that, it makes it a lot more attractive to a bank, he said, if the sellers would provide maybe 20 percent to 30 percent.
Besides being willing to finance part of the transaction, someone who wants to sell a business now should provide more information than he might have in sunnier times. A snapshot of the current financial condition may not make the best impression.
“Most likely your sales revenue and the number of customers and profitability are down from past years,” Mr. Vargo said. “One of the greatest things you can provide is more historical information” to let a potential buyer know that “we’ve been through this before and have been able to recover.”
Steve Kaplan, author of the book, “Sell Your Business for the Max,” said the key to selling a business in any economic environment is to find out the value that it has and to emphasize that value, even if does not appear on the company financials. He cited the example of a company that was purchased by Coca-Cola, which then ditched the company’s brand. “What they were buying was the distribution outlet into the frozen food cases,” he said.
Initiatives announced last week as part of the Economic Recovery Act of 2009 may help more deals happen.
Under the act, the Treasury Department will commit up to $15 billion to buy securities based on loans to small businesses. Like mortgages, these loans are packaged for sale to a secondary market, giving banks a source of fresh capital for new loans. Recently, secondary buyers have stopped buying, leading many banks to slow or halt lending. The hope is that as the Treasury buys securities, other secondary buyers will join in, breaking the log jam of frozen credit. Second, the Small Business Administration has temporarily eliminated fees for borrowers and third party lenders on some loans that it guarantees. In addition, the federal agency has temporarily raised limits for guarantees that it will offer on small business loans. The SBA will now guarantee up to 90 percent of a small business loan.
Even without those provisions, Ms. Hughes said lenders who attended a workshop for small business owners this month indicated that, notwithstanding the national credit squeeze, “If it’s a good idea and the buyer’s qualified, we’re still lending.”
This version corrects the first name of Mr. Mashuda.
Elwin Green may be contacted at firstname.lastname@example.org or 412-263-1969.
First published on March 25, 2009 at 12:00 am