The Recession Impact on the Business Brokerage Industry
Like the majority of businesses, the recession has negatively impacted the Business Brokerage world. As the recession took hold on the economy and business revenues began franchise consulting company to recede, so did business profits. With a reduction of over 30% in sales (turnover) for most businesses and fixed costs remaining in place (i.e., Insurance, Rent, Utilities), profits, value and cash flow suffered significantly from only a couple of years ago-most low cash flow businesses either closed doors or decided to sell.
Most sellers found themselves selling at less than one third its original business value-just like in Real Estate, it became a “Buyer’s Market.” Note: Although business value can be determined in a variety of ways; i.e., multiple of sales, EBITDA, Owners Benefit, Free Cash Flow, etc.-most businesses sell at a multiple of 2-3 times Owners Benefit, where Owners Benefit closely resembles EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization.)
Although one would think that buyers would greatly benefit from this recession, the recession had an impact on their ability to buy a business. With the failure of the financial markets and major banks, leveraging a business purchase became very difficult, indeed, due to the lack of financing availability. In normal economic times, one could purchase a business with 20% Equity and 80% Debt, normally based on a ten (10) year term. Although it is still possible to get this level of financing, the requirements have become a lot more stringent-requiring tax returns, financial statements, related business experience and much more.
Additionally, the Small Business Administration (SBA), the financing source of most small business purchases, became a lot more stringent (and efficient) in providing loans. It recently revised their SOP (Standard Operating Procedure) 50-10 by more than 1000 pages requiring more business appraisals and third party asset valuations for loans of over $350,000. Furthermore, equity injection to buy a business can no longer come from home equity loans or any other form of personal credit. Additionally, their treatment of Goodwill has also changed by creating a Goodwill cap of 50% of the loan amount up to $250,000.
As a result, sellers have taken on the financing burden. Today, sellers that want to sell their businesses quickly normally are required to finance up to 50% or more of the transaction.
Although the world markets have suffered through this recession, the shrink in the dollar value has created opportunity for many foreigners to purchase business properties in the United States, while taking advantage of Visa permits. Note: Foreign investors who invest a substantial amount of capital in a US enterprise and who will develop and direct the enterprise, may apply for an E-2 Visa if their country of citizenship has the required treaty with the U.S. The holders of the E-2 Visa may reside in the United States as long as they continue to maintain their status with the enterprise. With the sterling latest surge over the dollar, many from the U.K bought (and continue to buy) businesses in the U.S., primarily looking for the E-2. Normally, these buyers go after “cash cow” businesses such as low overhead Service Businesses which required minimal capital investment in fixed assets-such as Property Management, Lawn and Pool Services, and Painting services.
In summary, poor business valuations means poor sales prices which means low commissions for brokers. Likewise, buyer’s confidence in the market place and their inability to obtain financing creates less of an opportunity for a business sale, therefore, less commissions. The recession has had a very negative impact on the selling/buying of businesses and as such, Business Brokers’ have suffered accordingly. Those who survive the recession will be positioned to ripe all the benefits associated with the principle of supply and demand. I intend on being one of them!