Seller financing will become a reality for many owners wanting to sell in 2009. Because of deregulation and our friends on Wall Street, many Main Street businesses will not be able to sell. When the money supply contracts the first ones to feel the pinch isn’t big businesses, it’s small ones. What CPAs and bankers should have been telling their small business owners nearing retirement age is that selling for cash is much easier when there is available credit. The bankers, local included, have known for some time that trouble was brewing.

As banks look at their bottom line from the recent mortgage issues, there has been a ripple effect that reaches to small business owners.

The Federal Reserve surveyed U.S. banks and found that one third of them have recently tightened their lending standards for loans to small businesses. The Fed data shows that many lenders, nervous about their bottom line, have increased their credit standards for small business loans at a rate not seen since September 11, 2001, making it harder and more expensive for small businesses to get loans.

Even in a good economy, entrepreneurs find it harder to raise money for their projects. Today, they face the tightest credit market in nearly a decade.

Some businesses, such as printing companies and gas stations, have been deemed too risky and are not being funded. Anything to do with the “c-word” – construction – is radioactive, business brokers say.

Adding to the difficulty, brokers say, is a change in the U.S. Small Business Administration’s rules regarding certain types of loans. For example, the agency will no longer guarantee the goodwill portion of a loan for a service company.

The money spigot is not likely to open up further anytime soon. The Federal Reserve recently reported that the share of banks tightening loan availability to small businesses surged to a record high of 65.3 percent in the third quarter, up from 7.7 percent a year ago, according to its monthly survey of senior loan officers.

Around 65% of domestic banks say they have tightened their lending standards for commercial and industrial loans to small firms over the past three months, according to the July 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices, released in August from the Federal Reserve System. That’s up sharply from the 50% of banks reporting tighter credit in the April edition of the quarterly survey.

The National Federation of Independent Businesses’ most recent Small Business Economic Trends report sings a different tune, saying that that the credit crunch is a Wall Street-only issue. Thirty-four percent of the survey’s August respondents, a selection of NFIB members, reported regular borrowing activity. That’s in line with historical trends, although 10% said loans are getting harder to land. Only 2% of the owners polled cited the cost and availability of credit as their number-one business problem, far from the record 37% in 1982

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.
William Bruce, president of the American Business Brokers Association, sees 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.

Community Express represents a very small percentage of SBA loan dollar volume, about 2 percent. However, its financial results are weaker than those in other loan programs. The Community Express default rate in the past three years is more than double that of SBA’s other loan programs, and delinquencies are 45 percent higher than in other programs. Other performance metrics are similarly troubling. All of these considerations require SBA to closely monitor and evaluate its performance.

I’ve seen as many small businesses not sell because of price than for any other reason. The very best situation occurs when the seller accepts a few realities. It all starts with teamwork. You need your attorney, your accountant, and a specialist in business sales, mergers, and acquisitions. Each offers a different skill set; all three are needed to get what you want from the deal. Today, selling a business is so specialized that even the best attorney, accountant, or real estate broker cannot add the value provided by the business broker.
Today’s business buyers are very sophisticated. They have access to far more comparative information then did buyers years ago. Your business may be worth more — or less — than you think. Regrettably, sellers often shoot messengers who bring bad news. Be mindful that your attorney and accountant have a vested interest in not losing your account, but the goal of your business broker is to recommend a price that connects you with a qualified buyer.