It's A Buyer's Market Out There!

Written By: Mel Jones

Yes, these are words one expects from a brokerage firm like SellingRestaurants and SellingStores whose livelihood is to sell restaurants and retail businesses.  But the bottom line, it is true! 

Here’s why:

Interest rates – SBA interest rates are the lowest in several years. With 20% down, one can buy a profitable business, substantially increasing one’s chances of succeeding in the restaurant and retail industry.  With merely 20% down, one can buy a $150,000 annual cash flow business for about $30,000-$40,000 out-of-pocket!  Yes, that’s less than 20% down for a business selling for $300,000?  Remember, the bank also includes working capital (cash to you) in the loan.  The amount of working capital depends on the business’ revenue and type.

Prices – The earning multiples businesses retrieve on the open market are historically low.  Just two years ago SellingRestaurants sold premium businesses for nearly 3 times Seller’s Discretionary Income and some even more. Today, we’re seeing multiples closer to 2.2 to 2.5 or even less.  In addition, the amount of time to sell them takes longer, giving seller’s even more incentive to participate with buyers.

Seller financing – Sellers are stepping up to the plate and showing they believe in their business by carry a material portion of the purchase price at reasonable rate.  Two years ago this was a rare event.

Economy – It certainly is no surprise to hear the economy is running a bit slow these days.  Triggered by the collapse of the housing market followed by the credit crunch as a result of the sub-prime credit debacle leading to the devaluing of the U.S. Dollar due to the fed pumping billions of cash into the banking system coupled with the energy and commodity price crisis, the U.S. economy has suffered.  But this country is known for quickly picking itself up from crisis to get the country’s engine running again. We are two years into this down cycle and signs are pointing up.

The housing market has hit bottom in many areas of the west coast with existing home sales up substantially year-over-year.  Real Estate agents are reporting multiple offer situations in many areas of the west coast, signaling the first step of recovery in the housing market has begun.

The U.S. Dollar has been killed in the past year making imports expensive (oil) and exports cheap (food) to countries whose currencies have muscled-up to the U.S. dollar.  But in the past couple months the dollar has stabilized and has showed signs of strengthening. 

The sub-prime crisis is nearly behind us with much of the realized losses on the table and no surprises expected…famous last words, right!  Let’s hope. Furthermore, after the Bear Stearns debacle, the U.S. Government sent a message they will do whatever it takes to avoid a complete financial industry melt down, including lending money to these trouble companies at incredible rates.  This has brought stability to the lending industry which is the very foundation of business.  The banks are reevaluating their lending practices and have the cash to do deals.  Their just a bit more picky then before.

Landlord’s are in a weaker position.  As with any economic down-turn, the marginal players close their doors because they can’t compete.  All those customers the marginal players serviced take their business to the solid players, causing growth to happen despite the shrinking economy.  All those marginal players who quit are leaving behind empty spaces, and a lot of them too! This drives rents down and places the tenant in the position to renegotiate the rent. This was unheard of only 2 years ago.  This is attractive to buyers.  But never go into a deal thinking you’re going to get a rent concession, but try to get because this doesn’t happen very often. 

So does one stand on the sidelines and watch the economy turn up, interest rates head upward, sellers to stop financing, business value multiples go back up, retail vacancy rates to drop giving the landlords power, and retail sales go up because all the margin players are out of the game.  Or does one jump in while all the signs say we’ve hit bottom and there are bargains to be found in purchasing a business?  We at SellingRestaurants and SellingStores think there are bargains to be had in this market.  We often feel like a mosquito in a nudist colony…so much opportunity!