Reality Check for 2009

Fri, 13 Feb 2009 17:31:00 GMT

“As we start 2009, it seems that the economic world has ‘re-calibrated itself’ at about 65% of where we were. One absolute constant is that there is more stability on Main Street than there is on Wall Street. What you and I do in helping REAL people value, sell and/or buy REAL businesses to provide an income for themselves and their families, has never been of more value to our clients and customers and to our marketplace than now.”
Ed Pendarvis, IBBA Weekly Email Newsletter, January 2009

We thought it would be interesting to check some back issues of the Business Broker for what is a “reality check.” Read on!

Guess the year for each of the below quotes and see the answers at the end of Number 3.

Number 1
By the very end of the ___ and into the ___, the country was in a terrible recession. For the first time, an economic downturn impacted business brokerage. In prior downturns, buyers were out of work, and owning one’s own business was still the American Dream. Business brokerage flourished. This recession seemed to be different. However, also by this time business brokerage was different. The advent of technology, increasing rents and advertising costs coupled with higher commission splits with agents brought about an increase in overhead. Over the years, the minimum commission remained at the same level as in the early 80s. Many office owners decided that recruiting, training and retaining agents wasn’t worth the effort and so many of them elected to retrench and become sole practitioners. Many worked out of home offices or in executive suites.

As the country came out of the recession, business brokerage activity also increased. The economy began to grow rapidly fueled by the high tech and dot com industries. Following this growth were the private equity groups looking to back any start-up with promise. Companies went on acquisition binges and the merger and acquisition business boomed. Along with it – those brokers that focused on middle-market size deals. Business brokers, once content with “Main Street,” saw this activity and joined in. Business brokerage was, indeed, changing. It seemed that everyone wanted a piece of the larger deal. Many business brokers were from the corporate world originally and felt qualified to get involved in M&A.

Number 2
From most reports, this past summer has not been the best of times for business brokerage. Although some offices have prospered during the summer, the general feeling is that it was a slow season. Since we constantly do mailings for this newsletter, we can tell from the response – and from the mailing pieces that come back marked “no forwarding address” – that the slow summer months have taken their toll.

We are now approaching year end, and it may be time to reflect on the year – and comment on the months ahead for the business. Our feeling is that with unemployment in most parts of the country at low levels, the buyers who are normally replacing a job with a business are no longer in the market. It also appears to us that with all the help wanted ads and signs out there, many of those who are unemployed prefer it that way. The buyer who used to buy a small business for income substitution can now find employment and is therefore more reluctant to take the risk. Also, the mid-to upper mid-level white collar worker or executive is less likely to be interested in the traditional businesses that brokers have in their inventory.

There is much speculation about the way the economy is going. At best, the economy is at a standstill. Some experts are telling us that the economy will be stagnant through the end of the year and perhaps into ___. There don’t seem to be a lot of optimists around predicting a coming boom in the economy. Against this background many buyers, who in more optimistic times might be wiling to take the gamble and go into business for themselves, are waiting for a more opportune time.

The market now, in our opinion, is for those businesses that represent solid investment opportunities: businesses in the $150,000 to $300,000 range. The new “Mom and Pop” businesses are now franchises. And, at present, there is not a big market for the Mom and Pop businesses that are not. Buyers now don’t have to buy, but they will if the opportunity makes sense. These buyers have some cash and are even willing to leave the job for the right situation. They will buy a large coin laundry or dry cleaner, for example, as an investment. The listing files must be more complete, the information accurate – and the deal must make sense from a dollars and cents standpoint. But, the opportunity is there for larger commissions.

The old adage about there being a lot of buyers for every listing may be accurate in pure numbers, but we sense that today it is a buyer’s market. There will always be buyers for the top businesses, but those businesses where the sellers still believe in the “tooth fairy”
are not going to sell as they did in the past – at least unless they are priced to sell. The pro buyers remain solid prospects. Many of them are bargain hunters. There are still willing sellers out there.

We have some suggestions. Take them for what they’re worth.

• Don’t forget the basics and the business you’re in. Stay focused! Don’t let anyone pull you away from the business at hand.
• If you’re not handling franchise sales, you should be. More and more franchisors are realizing that business brokers can get the job done.
• Keep the overhead low.
• Make sure your top people are getting their share of the activity. In too many offices, the non-producers are taking from the producers. As one old grizzled veteran said, “You’ve got to feed your bears.”
• Direct your efforts to the $150,000 to $300,000 business. That seems to be where the action is today. This is even more true where the unemployment figures are especially low.”

Number 3
___ was not a pretty year financially. The national debt is $3 trillion and growing. The unemployment rate has hit 7 percent in many parts of the country, and the experts are predicting it will get worse. Oil prices have doubled, and some say it hasn't hit bottom yet. Then there's the Persian Gulf crisis and the threat of war. All in all, ___, to many, looks like "the worst of times."

Also, as usual, we offered our advice...

Here are a few tips to make you more efficient:
• Remember that the best listings are the ones that take time to get.
• Send letters or notes to those sellers you talked to in person last week. Tell them you enjoyed talking to them. Stay in touch.
• Contact your best listing prospects every 30-45 days at the least.
• Listen to what the business owner is telling you. Many times what they're saying is they really are thinking of selling.
• Don't forget that the best listings are those right next door.

Answer Key

Number 1 – the late 80s and very early 90s
Number 2 – 1986
Number 3 – 1991-1992

Comment
A lot of the above does sound familiar. A recession is not new. We can remember a few years after we entered the business in the mid 60s when the defense industry went down the drain. We often refer to the unemployed engineers coming into our office with a slide rule and clipboard looking to buy a business. We also know that we went thorough several recessions not knowing we actually were. Sure, business was slow, but somehow we survived. The Old Pro kept us on track by stressing the basics. If we had known there was a recession, we might have panicked – I’m not even sure I know what a recession was in those days. Ignorance, I guess, is bliss.

Today, the media reminds us every day that the economy is awful, unemployment increasing, businesses are closing and many of the box stores are going into bankruptcy. Our local Circuit City is closing, our local Linen & Things is closed and a visit to a local Office Depot has a “going out of business” sale. The company may not be folding, but our store is. This is the second big box office supply store that has closed, leaving only Staples and no competition. Wouldn’t it be nice if an independent office supply and stationary store opened nearby.

I hear all of the concerns from business brokers that I talk to. We know that many are struggling and that others will also. However, the good news is that a business broker can’t lose his job and there will always be a deal, if not today, then tomorrow. When I was going through what later was termed a recession, I never once gave a thought to leaving – business brokerage was what I did and I loved it. Besides, what was an English major going to do if he left business brokerage? I cut expenses, hoped the Los Angles Times wouldn’t cut me off from my advertising, ran a bit late on the office rent and hoped we would get a deal soon. It even got to the point where without a closing we would be in serious trouble – we got it.

It is the next deal that keeps us going. But, keep in mind that we provide a valuable service. People will always need to sell a business they have worked hard to build and owning one’s own business is, probably now more than ever, still a substantial ingredient of the American Dream. Business brokers are the catalyst for making that happen. There are times, like now, that can be slow for some, but our services are still necessary. Sure, SBA and others may not be lending or only under very stringent requirements, but in most of the years that I was active I didn’t have a clue what an SBA loan was. The seller either financed the deal or it didn’t work.

The wonderful part of being a small business owner – and make no mistake, business brokers are small business owners – is that we can change how we do business instantly; there are no boards of directors or corporate bureaucracy telling us what to do. If you want to raise or lower commissions, charge upfront fees to help cover marketing expenses, get rid of poor performers, move the office (lease permitting), change the type or size of business(s) you sell, add a specialty (like professional practices or dog kennels), or whatever – you can start tomorrow.

Or maybe it’s time to get back to the basics and put a few deals between you and the next car payment. When times were tough, the Old Pro went to his local Cadillac dealer, and drove out in a new car. I suspect making the payments were his reason for making the next deal.

A Formula for Success

• Obtain two (2) or more saleable listings weekly.

• Make proper use of every minute of your floor time.

• Call ten (10) businesses daily for listings (yellow pages, newspapers, etc.).

• Call three (3) or more “owner ads” every day.

• Mail at least ten (10) cards, brochures or literature every day.

• Contact by phone or in person daily two (2) of your listings to improve them.

• See one (1) or two (2) of your firm’s listings every day.

• Avail yourself of every opportunity to learn more about this business.

• Be vigilant! Treat each and every listing, ad call and prospect as though it were the last one you might ever receive.

• Do not be a commission cutter.

• Constantly strive for ethical and factual documentation, for the purpose of reducing your personal percentage of sales that were never consummated.

• Don’t join the 9 A.M. coffee group.

• Avoid all and any negative conversations.

Do the above comments sound like good advice? They were written by The Old Pro (our mentor) in 1979, but we actually heard them year’s prior. Good advice has no time limit!

When asked in an interview in June 1983: “The business opportunity business seems to have had a few bad years, what with the economy, high interest rates and unemployment. What are your thoughts?” – the Old Pro’s response was: “There are no bad years for good people. The people who are not willing to work can’t make it in good or bad years.”

BBP

Reality Check for 2009