Shutdown Threatens Small Business Sellers

The government shutdown continues to drag on and experts say that every day without a resolution compounds the injury to small businesses, particularly those owners who are looking …

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The government shutdown continues to drag on and experts say that every day without a resolution compounds the injury to small businesses, particularly those owners who are looking to sell. Analysts note that sales prices for small businesses are up at the moment and are expected to continue trending well, but a prolonged shutdown could threaten the momentum created by the recovery. Failure to process loans by the Small Business Association, a lack of buyer confidence and just generally less money in the market could all play a role in dampening sellers’ chances of unloading their businesses. For more on this continue reading the following article from TheStreet.

After 26 years in business, Connie Todd, 56, owner of children’s clothing store Connie’s Kids in Chesapeake, Va., plans to close her boutique if she can’t find a buyer.

But Todd isn’t just looking for the highest bidder. Price is a factor, of course, but a number of other factors must align in order for Todd to agree to sell. Most importantly, the buyer would need to be someone who will understand her target customer (mainly moms and grandmothers), appreciate the classic, traditional style of clothing she sells, while at the same time be able to infuse new styles to appeal to older children and young moms.

"One gentleman called me off of [my ad on] Craigslist," Todd said during an interview in September. "He wasn’t the right fit," explaining that the inquirer seemed to be an investor looking to add the store to his portfolio. He didn’t seem to have experience selling kids’ clothes, she said, and that turned her off from a potential deal.

Todd’s store is one of many that got caught between an intense recession and the overall greater competition from large discount retail chains and online stores that today are placing extraordinary pressure on small bricks-and-mortar retailers.

"I’m looking for someone who has that passion for it as I do," she said. "I’m just praying for a miracle that that person is out there, who I was 26 years ago."

But Todd now has another worry: Will the government shutdown effectively shut out any potential buyers?

"I am still hoping for a buyer, but with the government shutdown, our area has been hit hard, so I am a little less optimistic than I was a few weeks ago," Todd said on Monday.

As of this article’s deadline, the U.S. government is still in a week-long shutdown of all non-essential government services as Republicans and Democrats remain divided over President Obama’s controversial health care reform.

The longer the government remains closed, the probability is greater that it will cut into this year’s strong performance for small-firm exit transactions.

"The longer it strings out, the more uncertainty that it creates for the economy and it could ultimately, of course, have negative effects on financing availability and rates," said Curtis Kroeker, group general manager of CoStar Group‘s (CSGP) BizBuySell.com, an online marketplace for buying and selling businesses. "Both of those effects would likely dampen small business buyouts (not to mention the economy as a whole)."

One government agency that is being hampered by the shutdown is the Small Business Administration. Banks essentially can’t approve SBA-backed loans until they obtain guarantee levels from the agency, which is on hold until furloughed employees are back on the job.

Small business loans from banks have already started to slow by the end of September, according to Rohit Arora, CEO of Biz2Credit.com.

"The economy is still in a fragile state of recovery," Arora said Tuesday, regarding the release of Biz2Credit’s September small business loan approval data. "With the SBA not currently backing loans because of the shutdown, October’s numbers are also expected to drop. This is bad news because small businesses, which create the bulk of private sector jobs in the economy, need capital in order to grow."

Even if the government shuts down for just one week, it will create a three to four week backlog in SBA loan approvals, Arora told TheStreet last week.

So far, though, there is minimal effect on the small firm buyout market. As of the third quarter, 2013 is shaping up to be a banner year for small-firm buyouts. Year to date, small-business exit transactions increased 53% to 5,409 sales, according to BizBuySell.com, based on the latest report of closed transactions by the nation’s business brokers released Tuesday. Roughly 90% of the businesses tracked by BizBuySell.com have asking prices of less than $1 million; on a median basis, prices are less than $200,000.

The third quarter of 2013 continued the ongoing trend seen this year — small business transactions for the period jumped 41.7% to 1,685 exit transactions compared to the year-earlier period, with restaurant and retail categories leading the way up 109.4% and 60.9%, respectively, BizBuySell.com said.

The significant boost in transactions appears to be driven by a recovering economy, strong supply and demand fundamentals (i.e., an aging business owner demographic and an increase in the number of qualified business buyers) and continued improvement in small-business revenue.

"It is by far and away the strongest year we’ve seen since before the Great Recession," Kroeker said.

Within the larger U.S. M&A market, this year through Sept. 30, the number of deals totaled $865.1 billion, up 39% from the same period a year earlier to become the highest first nine months total since 2008. The period was boosted by Verizon Communication’s (VZ) $130 billion acquisition on Sept. 1 of the remaining 45% stake in Verizon Wireless from Vodafone (VOD), according to Dealogic. Third-quarter deal volume of $350.7 billion was the highest third-quarter total since 2000, Dealogic said.

The steady improvement in small-business financial health is allowing business owners to ask for more money from buyers, who appear willing to pay.

The third-quarter’s median sale price rose to $180,000, up 2.9% from the June-ended quarter.

According to the data, median revenue jumped 8.9% year over year to $420,000, and 6.7% over the $393,700 figure recorded in the second quarter. Cash flow also rose 5.4% from the second quarter to $98,034, the data found.

Still the third-quarter transactions were 8% lower than the exit transactions completed in the June-ended quarter. BizBuySell.com said the quarter-over-quarter decrease should not be interpreted as a weakening of the fundamentals, but rather the end of a trend by business owners who were motivated to sell at the end of last year based on concerns over the fiscal cliff.

BizBuySell believes that the elevated number of businesses being sold will continue, even though next year’s comparisons will likely fall.

"I think we’re going to continue to see strong activity through the rest of this year and frankly for a number of years," Kroeker said.

"When a small business changes hands, the small-business owner spends money to fix it up just like a homeowner would … to improve the performance of that business," which likely means short-term investments in things like hiring, remodeling, new merchandise, etc., Kroeker said. "Like home sales, there’s this whole ripple effect."

"On average, a new business buyer spends $96,000 during the first year of business ownership to improve the business," he said. "That’s why more small business sales are good for the economy at large."

Timing was right for Earl Kluft, the former owner of E.S. Kluft & Co., a luxury mattress manufacturer in Rancho Cucamonga, Calif., known for its $33,000 Palais Royale mattress sold exclusively at Bloomingdales. Kluft sold a majority stake in his company to U.K.-based Vi-Spring (a subsidiary of Madrid-based Flex Group) in July. He didn’t disclose the price, but under the terms Vi-Spring will have the option to purchase the remaining shares over time.

The transaction wasn’t affected by concerns over a prolonged government shutdown.

Kluft had two reasons for selling. The first was strategic — the luxury mattress market in the U.S. does not have a lot of opportunity for growth. Kluft wanted to get his product into more international markets, but it would have taken longer if he did it organically.

The other reason was personal. Kluft is 65 and none of his three children, one of which even works in the company, had any interest in running it after he retired.

"The clock’s ticking along," Kluft said. "[It’s] a changing market. The U.S. part of it is very difficult to keep growing it."

"We needed some really good caretakers and these guys are perfect," Kluft said of Vi-Spring.

While he is still running the company right now, Kluft will eventually step aside, but wants to remain at the company in some capacity.

"There’s a plan to bring in a CEO in the next couple of years and I would like to be the chairman emeritus," he said, adding that he would like to continue meeting with customers, contributing to product design and be the brand spokesman "until I can’t do it anymore."

According to Kluft, Vi-Spring is OK with that.

"We negotiated hard, [but] the price was not the most important thing for us. It was more important [to retain] the legacy of this company," he said.

Kluft also acknowledged that the timing was right for the sale. "Maybe these guys a couple of years ago wouldn’t have been as anxious to do this," he said. "The timing of the plans were aligned. I think you will see more."

This article was republished with permission from TheStreet.

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