Jack Halloran is a small business money broker from New Haven Connecticut who owns the company Vest Net. According to Halloran, sales of small businesses (with sales under 10 million) are brisk – despite a challenging economy. While it may sound ironic and contradictory, Halloran explains that the high unemployment rate is actually one of the primary causes of this surge in sales.
Why is that? There are lots of people with no job, Halloran says, who nevertheless have some cash to invest. Buying their own small businesses is essentially an effective and instant way for them to put themselves back to work.
Buy Yourself a Good Job:
Tim Johansson, a former assistant staff accountant for a medium-sized maker of screw plates used to build aircraft, is one of those people who bought himself a business in order to purchase a new career. At 30 years of age, Johansson was downsized out of the job he had held for a decade and found himself standing in the unemployment line.
“I felt secure in my position,” he says, “but in the blink of an eye I found myself looking for a new job. My prospects grew dimmer and dimmer with each passing day. I was getting frustrated, anxious, and depressed. Then my father suggested that I buy a small business. The search did not take us long. I signed up with a small business broker and within 120 days I owned and was running my own liquor store in a nearby town.”
But there is another compelling reason why many privately-held businesses are now being sold by their owners. Congress is talking about the elimination of the current 15% capital gains tax rate, in favor of a rate that could be as high as 23.8%.
Since this could happen by the end of next year, owners who sell their businesses before the possible rate increase will pocket more net cash. They could potentially save as much as 8.8% - which is a gigantic gain in today’s rather lackluster financial environment. So these rumors of a possible capital gains tax rate increase are also contributing to more sales of small businesses.
Affordable SBA Loans:
Whether you are a buyer or a seller, this kind of transaction may be a smart financial move. But as Halloran explains, the main obstacle to a successful sale is acquisition of adequate financing. “Most people just don’t have enough cash on hand to pay for their business outright,” he says, “and owner financing is not always an option.”
One viable alternative is a loan from the Small Business Administration (SBA). In recent years the SBA has ramped up lending to people wishing to start, buy, or expand a business. As Michael Jones, Senior Vice President of Main Bank & Trust in Norwalk Connecticut explains, all of his startup loans and loans to buy small businesses go through the SBA.
Banks that participate in the SBA lending program receive anywhere from a 75% to 90% guarantee, sharply reducing the exposure to lenders in the event of a borrower default. As a result, rates on these SBA loans are currently only around 6%. Hard money loans, which are another flexible option, require less collateral, less than perfect credit, and offer a fast turnaround. But rates on those loans will typically cost you 12% or higher.
Franchise Rewards and Risks:
One area of significant growth among small businesses operators is within the franchise marketplace. That’s because in 2008 new laws were enacted to help more businesses adopt the franchise model, so today there are many more opportunities for franchisees.
“I am amazed at just how many new franchise business opportunity training have come to the market,” says Robert Jensen, a franchise attorney from Lakeside, New York. “You can buy a franchise to offer in-home care for elderly and disabled, personal shopping services, picking up dog poop, or to run an online travel agency. You can even buy a franchise to sell other franchises.”
But before investing in a franchise buyers need to perform their due diligence. Don’t fall for the myth that most of the hard work is done by the franchisor or seller. “Nothing could be further from the truth,” says Jensen. “Once you pay that franchise fee – which could range from $2,000 to $150,000 – the work has just begun.”
While Jensen is in favor of allowing more business to franchise, he cautions prospective buyers to be aware of exactly what they are getting into and exactly what to expect from their franchisor. Many franchise buyers who lack proper industry or business experience or adequate funding will be unsuccessful, which is why franchises have an exceptionally high rate of failure.
Making Smart Decisions:
Buying or selling a business is very personal and important one, and it is wise to talk to as many experts as possible about your plans before making a decision.
But don’t just limit your discussions to financial counselors, attorneys, and accountants. Get out there and talk to other people who run the kind of business that interests you, as well as with successful business owners in other fields or industries.
Explore the pros and cons, ask tough and probing questions, and acquire as much education about the venture as possible. Then you’ll be able to make a more informed decision about what is your best course of action.