Business & Commercial Listings Sales Guide

Buying a Small Business in the Current Economic Climate

By Ron J. Gasparro, President and Founder of The Realty Stop Agency

Most people would think it would be counter intuitive to purchase a business in the current economic climate. Wrong! Due to mass layoffs, people especially in their 40s and up -- or any age for that matter -- may be considering starting that business they always wanted, either to have more independence, increased income or both. Whatever the motivation, starting a business now may actually be the best time
to buy a business due to lower prices.

The first question that may come to mind is what types of businesses are safer than others in this economic downturn. Businesses such as delis, pizza places, small cafés, laundromats, and bars are some of
the businesses that are good choices. You have to think in terms of services that people cannot do without. On the other end, the higher-end restaurants are the ones that are being sacrificed right now with a 30 to 35 percent cut in business.

And from a retail standpoint, every retail sector is off by 30 to 35 percent, but places such as Radio Shack and Sears have compensated by reducing their prices, selling more quantity, and making less product. But although the type of business a potential buyer considers purchasing may be influenced by the current economic climate, the process of doing so does not change.

This process should begin with the potential buyer considering three things: making sure the funding is available, judging themselves honestly on their ability to run the type of business they plan to buy, and getting qualified people on their side to go through the process, such as a business broker, attorney, accountant, and inspectors.

Making sure the funding is even available to purchase a business is key, especially in this tight market. In the past, funding has involved getting lines of credit, a home equity loan, refinancing, but the banks have
cut off all of this. In lieu of these funding streams, a potential buyer may ask the seller if they will carry a note on the property. Then, the new owner will sign a personal note guaranteeing they will pay them back.

Regarding the 2009 Economic Stimulus Package that recently passed, it may help prospective buyers indirectly.

If the stimulus package frees up money through home equity loans, lines of credit, or refinancing, that will help in that a prospective buyer can borrow from their home, but it will not help them directly, as with a small business loan.

There are misunderstandings about small business loans or SBAs. It is a misnomer that a prospective buyer of a small business can get a SBA so easily. In theory, it sounds good; but in practice, 90 percent of small businesses do not have the requirements for a SBA loan because their record-keeping is not as good as required. And if it is a lease-based business, banks will not fund them because there is no equity unless there is equipment.

If the business involves property, though, banks will often loan 75 percent of the value of the property that is associated with that business.

And, whereas, most industries have a standard method in determining a valuation for their business — using
the previous year’s revenue, the market value of equipment or property used in the business, etc… — small business have these plus more subjective factors that are at play when determining their value.

Objectively, there is the value of the property, the value of the in-house property, and the good will that was established, or the hard work and dedication the owner put forth in building up their business. But, small businesses are more of an impulse buy — one person may spend thousands more if it is conveniently located, exactly what they want, and any other factors that assure them the business is for them.

No preparation is needed prior to a prospective buyer making an appointment with a commercial real estate broker — no need to find an attorney, an accountant, an inspection company. Our commercial brokerage firm, The Realty Stop Agency, will put all of this together for them.

We are one stop for all of your real estate needs…largest in the area serving New York and Connecticut. Our job is to make a happy mix with the prospective buyer and the seller and to assist the buyer with referrals
to attorneys, inspection companies, and accountants and to work through whether it is good for them and whether they are even qualified to buy the business.