Many recently laid off individuals are deciding to become small-business entrepreneurs to gain more control over their future, and buying an existing business is top of mind for most of them. In a time of great economic uncertainty, however, many of these aspiring entrepreneurs are now dealing with a difficult decision: Should I buy a business now or wait until the economy turns around?
Without question, the recent economic downturn is making many entrepreneurs hesitant to enter into a marketplace filled with higher risk and lower profit margins. Many prospective business buyers are heading to the sidelines, deciding to hold off until we make it through this recession, and, to a certain extent, that's completely understandable.
After all, buyers have so far taken significant hits to traditional sources of financing, such as their home equity and mutual fund investment accounts. This, combined with a general lack of accessible credit, would suggest that it's a tough time to pull together a deal to buy a company.
Common wisdom fails in one critical dimension -- it's dead wrong. In my mind, it's actually a great time to buy a business.
Here are four reasons why now is not the time to be gun-shy about buying a business:
1. Prices are low
While many of the indicators that are used to track business valuations suggest that sellers can command a premium for good businesses in this market, there is at the same time strong evidence that there are quite a few distressed sellers out there who are willing to sell at a lower price than they might otherwise get in a booming economy.
For many businesses that are selling now, there is a need to sell. Those businesses that have decided not to sell can wait until the economy turns around, but a significant number of businesses for sale that are available right now have a higher sense of urgency.
For would-be buyers, this means there are deals out there. If you wait until the economy improves and credit eases, you will miss this window of opportunity. Prices will rise during economic recovery and more buyers enter the market.
2. Seller financing is available
I know what you are thinking: "I'd love to buy a business, but it doesn't seem like I can borrow the money to do it." The answer to this conundrum is seller financing. As you might know, seller financing is when a seller, rather than a professional lender, assumes responsibility for a percentage of the buyer's investment.
Historically, seller financing typically comes into play when a buyer is unable to secure financing at the owner's asking price. The business owner then has two options: he can either lower the asking price, or work with the buyer and provide seller financing to overcome a potential deal-breaker.
These days, many sellers are offering seller financing before they even meet a buyer. Sellers know that banks are not lending, so many are willing to finance the deal themselves. This means you can buy a business right now even if you cannot get bank financing. So why wait until the economy turns around?
Believe it or not, you can usually get a better rate from a seller than you can from a bank. You have considerably more leeway to negotiate the right down payment, the length of the loan, monthly payments and interest rates. Plus, if you pay the loan off early, many sellers also often accept a discounted balance.
One of the most productive avenues for finding a seller-financed company is through online resources like BizBuySell.com. Business listings often contain information about the possibility of owner financing. You should get professional legal and financial advice, however, to ensure that your financing agreement is airtight.
3. SBA loans are coming back
We all know the Small Business Administration backs loans available for start-ups. It's also been widely reported that the SBA loan program has stagnated over the last few months. That's because, unfortunately, SBA lending has become unprofitable for many lenders.
What you may not know is that the agency recently took steps to make SBA loans more profitable for banks, and they have eliminated a variety of other obstacles to government-backed lending. In theory, this should mean that your local banker will now be more willing to sit down and discuss the SBA's 7(a) loan program with you. So, credit may quickly become more available than it has been recently. That's one more reason I think buyers should be actively looking for businesses to buy.
4. There is no time like the present
Finally, I recommend that buyers not wait for the economy to turn around simply because the best entrepreneurs don't wait for perfect market timing. Firms like Microsoft and Apple were started in the midst of the recession in the 1970s.
In fact, there are many reasons that businesses that start in a down economy do better than those that don't. Market share is up for grabs because buyers of products and services are scrutinizing expenses. That gives new business owners a big opportunity. Furthermore, suppliers may be willing to offer great prices because, in this downturn, they are hungry for business. It's also a great time to bring on employees. There are many talented individuals looking for work now, and they may be available at more reasonable rates. That's not going to be the case after the economy turns around. Buyers who learn how to focus on revenue growth and to closely manage expenses during tough economic times can leverage those skills for greater business success as conditions improve.
Remember, when shopping for a business to buy, you are under no obligation to make an offer. So there's really no harm in browsing. And, with a little luck, you may find your dream business at a great price.