Posted 09-28-2008 6:06 pm by

The financial crises happening in our economy have created important ramifications on small business owners wishing to sell their businesses.

How do the financial problems experienced by Washington Mutual, AIG, Lehman Brothers, Fannie Mae and Freddie Mac impact the market of buying and selling small businesses?  The most visible impact is that banks are a lot more reluctant to lend money than before.

Imagine your business is worth $200,000.  Most buyers of your business are not big companies or institutions, but rather individuals feeling tired of working at a corporation and looking to own their own business.  These individuals may not have $200,000 of liquid cash, but have equity in their house to use as collateral on an SBA loan.  An SBA loan you may see in today's market takes 20% down with terms of 10 years at 7.5% interest rate.  However, the lender would require a Debt Service Coverage Ratio (DSCR) of at least 1.2 to 1.3, which is a requirement most small businesses have a hard time meeting.  

To put it another way, a lot of small businesses do not generate enough cash flow for a buyer to get qualified for a bank loan.  It is not enough to find a buyer who is willing to pay you the price you want for your business - you have to get the bank to approve the loan, which is getting increasingly difficult in today's market.  A lot of business sales between $200,000 and $700,000 have long closing times due to the banks being very slow at approving loans.

On the other hand, businesses under $100,000 are easier to sell right now because more buyers can buy the business without needing a bank loan.  These businesses may not generate a lot of cash flow, or simply do not have accurate books.  However, these purchases can be a good idea for entrepreneurs that know how to set up infrastructures (such as an owner of 3 restaurants looking to buy a fourth restaurant that does not keep good financial records, but has a good location).   

In conclusion, high-priced businesses (over $1 million) with excellent cash flows are not very affected by the financial crises because the buyers are corporations with money, or individuals who can get a loan easily due to the great cash flow generated by the businesses.  Low-priced businesses (under $100,000) may not make very much money, but are still easily salable because individuals or their competitors can acquire them without needing a bank loan.  It is the middle range businesses ($200,000 to $700,000) with some cash flow but not quite enough that have a tough time selling right now due to banks being much tighter on their credit policies.  

---Written by Oliver Wu