Business Sales On The Rise

The following article from Fortune Small Business discusses the increase in the sales of small businesses. Although I agree that during economic downturns the sale of “main street” business tend to rise, the article fails to point out several very important factors. First and most important is it does not discuss how the sale of the businesses was financed. Given the current commercial lending conditions for business purchases, it is my belief that there is a tremendous amount of seller financing that is occurring. This alone may explain why the median sale price has gone up. Traditionally, businesses sell for a higher price when the owner is willing to carry the debt service. This important factor is key for a Seller to understand so that they do not have an unrealistic expectation of the value of their business, and so they do not believe they will be able to sell their business for all cash since “business sales are on the rise”. The other problem I have with the article is that the information they are relying on is dependent upon one source. Despite the fact that this alone is not a good way to make sweeping generalizations about an economic indicator, the method of data collection by BizBuySell is totally reliant on brokers who also derive an economic benefit from reporting business sales are on the rise. In addition,the information from the brokers is not verified. There are many other limitations in the articles methodology but even given those, I do believe that this is a good time to buy a business when corporate jobs are not as secure, and because “main street” businesses will always be necessary for our country to operate. If you are interested in selling your business, make sure you work with an experienced business broker who understands both valuation and the business sales process. For more information on selling or buying a business, please visit www.empiresandiego.com. Enjoy the article below.

Sales of small businesses on the rise
The economy is struggling, but sales and valuations of small companies are up,
(Fortune Small Business) -- It's time to spruce up the window displays and organize your accounting records: Despite the economic downtown, sales of small businesses are starting to boom.
Business marketplace BizBuySell's latest quarterly Insight Report on nationwide sales trends shows a 48% jump in the number of businesses listed on its network that sold during the first half of 2008, compared to the year-earlier period. A total of 3,894 businesses found buyers, up from 2,640 in the first half of 2007.
Listing rose in tandem: BizBuySell.com had 41,674 active listings on its site in 2008's second quarter, up from 29,468 during the same period last year, a 41% increase. Most promisingly for business owners, the prices buyers are paying have also increased. The median sale price for businesses tracked by BizBuySell was $200,000 in this year's second quarter, up from $186,000 during the same period last year.
BizBuySell, the largest nationwide marketplace for buying and selling small companies, compiles its sales data from closed-transaction reports sent in by brokers. For-sale-by-owner deals closed directly are not included in the totals.
BizBuySell General Manager Mike Handelsman was surprised by the listings jump, considering the slumping economy. "We expected to see a decline, but all metrics are on the rise," he said.
But to William Bruce, president of the American Business Brokers Association, an inverse trend between small-business sales and the health of the overall economy isn't unusual.
"When the economy slows, business executives want to downsize and employees have a fear of being transferred, outsourced or fired," he said. "As a result, these employees see small-business ownership as an attractive and viable opportunity." Plus, layoffs often bring with them severance packages - a good source of capital for people considering launching their own ventures.
Another promising sign for business owners: Valuations are also increasing. The average multiple of revenue for businesses sold in the second quarter was 0.69, according to BizBuySell's data, up from 0.64 a year ago. That means that a business with $395,000 in annual revenue (the median for BizBuySell's second-quarter data) would sell for an average of $272,550.
At the high end of the market, sales are shakier. Two years ago, a feeding frenzy of small business sales was driven in part by the easy availability of credit and financing for acquisitions. Today, banks are warier about lending.
Private equity network NVST, which gathers information on merger and acquisition market activity, is having a hard time finding completed transactions. "I attribute this to the downturn of economy and lack of available credit for financing deals," said NVST editor Andrew Dolbeck.
Indeed, according to FactSet Mergerstat the number of deals valued at $100 million or less started plummeting in 2007. In the first two quarters of 2008, FactSet tracked 3,106 companies sold, down from 4,433 companies in the same quarters last year.
But while Wall Street struggles, buyers and sellers sticking to Main Street are still seeing a robust market.
"It's a good time to buy if you have the resources

What Are Banks Looking For in the Business Purchase Loan Package

A frequent question asked by both buyers and sellers of a business is what is a bank looking for in the loan package. Harlan Friedman of Lightning Commercial Funding recently sent out an excellent summary that answers this question:

The Loan Package

An underwriter while viewing a loan package needs to get a true feel for the deal, they have certain questions and criterions that need to be met. Below are some of the important issues that are raised in the underwriters mind and the corresponding sections of the professionally prepared loan package.

A properly prepared package should answer the following inquiries by the review underwriter.

Does the business in question have a positive cash flow that is supported by historical documentation?
This is answered by including the appropriate financial statements and tax returns

Can the business support additional debt?
This is answered by taking a comprehensive look at the current as well as the future cash flows. Also it can be determined by the seller’s discretionary income at the end of the day.

Is the individual that is attempting to secure the loan qualified to run this business?
This is answered by the inclusion of his current resume, as well as any supporting documentation.

Does the prospective purchaser have marketing and business plan to demonstrate knowledge of the business as well as their plans for repayment and future growth?

What are the projected revenues for the new business?

What is the current financial situation of the borrower?

If a buyer of a business just walks into their local bank, and does not have an individual who knows and understands the process the loan will definitely take longer. But a professionally prepared package answers all the above questions that an underwriter needs to have handled and thus makes the time frame for approval and ultimately closing much faster. For more information on business loans, please visit Harlan's website at www.loanforbiz.com

If you are thinking about selling your business, or need more information on the process, please visit our website at www.empiresandiego.com