Andrea Edmunds got a great deal when she decided to buy a small business. But that still didn’t make it easy.
Edmunds recently bought back PoshTots and PoshLiving, two linked retail companies she had co-owned until three years ago. The firms’ new parent company was in bankruptcy court and Edmunds wanted to buy the businesses back, even though the companies’ sales were way down and financing is hard to get.
“I had enough confidence and faith that it’s going to turn around,” Edmunds said of her businesses and the economy.
Edmunds managed to accomplish what many would-be entrepreneurs are hoping for in a troubled economy: to buy a small business despite the many obstacles that are making deals hard to complete.
Business brokers, who bring buyers and sellers together, say there are a growing number of people who want to buy, including many who have lost their jobs over the past year and need to make a living. And there are plenty who want to sell, including baby boomers hankering for retirement.
Getting financing for deals is still tough, although the government has taken steps to make Small Business Administration loans easier to obtain. The brokers say banks are not only uneasy about borrowers, they’re also questioning the health of the companies up for sale.
“Even with those changes, we feel that it seems as if the money may never reach the small business owner,” said Jeff Hoops, senior vice president of The Haley Group in Paso Robles, Calif.
Small businesses have found it hard to borrow from banks for years, long before the recession; a neophyte owner or company has been too risky for many banks to take on. The recession and banks’ unwillingness to lend in general over the past six months have made it that much harder.
Edmunds said her financing came from a private, locally-owned bank that was supportive of her plans. The fact that she knew her businesses so well was a plus, and the purchase price was down dramatically — $735,000, compared to the $12 million she and two partners got three years ago. The companies, based in Glen Allen, Va., sell upscale home furnishings.
Brokers are seeing lower prices in general along with fewer transactions.
Peter Berg, managing director of Transworld Business Brokers in Fort Lauderdale, Fla., said the volume of deals his firm did last year fell 10 percent but the value of all the deals put together went down 30 percent.
Meanwhile, deals are taking longer to complete while banks give prospective borrowers and companies much closer scrutiny. Emmet Apolinario, who owns a Sunbelt brokerage in Columbus, Ohio, said that before the credit crisis, a purchase could close in 45 to 60 days after an offer was accepted. Now, one of his pending deals will take five months to close.
Would-be buyers have been hit in several ways. Besides the bank financing issue, the nest eggs they would have used for down payments have shrunk as the stock market plunged. They can’t draw on home equity because housing prices are down, and if they already had a home equity line of credit, their banks have very likely pulled the accounts or cut them drastically. Also, banks that are willing to lend are demanding bigger down payments.
Sellers have their own set of problems. More of them are having to act as lenders to close the deals. Apolinario has been telling them, “there is no way I can get you 100 percent cash. You will have to provide some seller financing.”
That does have an upside for sellers, though: They get income from the interest on the loans they grant their buyers.
But, Apolinario said, many owners are also finding that they can’t get the price they expect on their companies; these assets have fallen in value along with real property and stocks.
Brokers see small signs of a possible pickup in deals. Apolinario said the SBA loan changes have led to more prospective buyers calling.
Berg said he sees many people actively looking for a company: “They either have been laid off or are afraid of being laid off and want to be pre-emptive.”
Still, he said, “it doesn’t mean an uptick in the number of transactions. We’re just seeing an uptick in the number of inquiries.”
Hoops expects the climate for buying and selling to start picking up perhaps as early as June, “when people get comfortable with the fact that they’re going to have to live with this (economy) for a while.”
He expects prospective buyers to say, “things are bad, but I’ve got to plan for what I’m going to do next, no matter what happens in the economy.”
Franco Ferrari, owner of a Sunbelt business brokerage in Casselberry, Fla., near Orlando, expects that the entrepreneurial spirit is what will bring more buyers in, rather than expectations that government steps will heal the economy. “There’s confidence in their ability as a mom and pop operator that they can go in there and make that business produce,” he said.
Copyright 2009 The Associated Press.