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Fuel prices have doubled recently. Does that mean you don't buy a car?
Due to the nearly monthly increases in interest rates, some purchasers are becoming extremely anxious and some backing out of transactions. The SBA has also recently approved a spread increase for lenders that became effective August 1, 2022 allowing lenders to increase the price of loans, adding fuel to the fire. The revised permitted rates are:
• $50,000 and Less: Prime + 6.5%
• $50,001 to $250,000: Prime + 6.0%
• $250,001 to $350,000: Prime + 4.5%
• In excess of $350,000: Prime + 3.0%
This makes the cost of acquiring a business more expensive – but, does that mean you shouldn’t purchase a business in this interest rate environment? My argument is a profound “NO”.
Buyer Types There are two common business buyer types; those with experience in business transactions and first-time buyers usually with less experience. More seasoned buyers who have typically bought and/or sold seven figure plus enterprise value businesses make their decisions more on logic than on emotion. These buyers treat the fees and interest rates as just another aspect of the transaction - it's a cost of doing business. No different than an annual lease increase. They realize that an increase in interest rate doesn't negate all of the many benefits of business ownership. They know that waiting or deciding not to acquire a business because of marginally higher cost to do so is a bad idea.
If yesterday you could play 10 hands of blackjack and win all 10, but today you can play blackjack and know you will only win 9 of the 10 hands do you still play today? Of course you do.
If you have a bag of apples and one goes bad do you throw the entire bag away? Obviously not.
Lenders and Loan Packager Considerations Business buyers have options when raising capital to acquire a business. The most common is a commercial bank loan guaranteed by the Small Business Administration (SBA). But, there are two paths to this door; one is working with one bank directly. The other is working with a loan packager. One of the benefits of working with a loan packager is that they have relationships with hundreds of commercial lenders (not just one) and they know what size, geography and industry each bank prefers; making loan approval more likely and faster. A seasoned loan packager is aware of all of the nuances to the SBA guidelines and is current on changes and updates. They also take care of all the details for you. There are also several optional SBA guidelines that can help high net worth buyers. An experienced loan packager, such as Diamond Financial Services, will emphasize how to provide the greatest financing choices available, minimizing required down payment, and avoiding high collateral regardless of who the lender or even who the loan packager may be.
The buyers of smaller businesses often have a different perspective, and the fees can have a greater impact on their after debt service cash flow making a loan packagers services even more attractive. It can be difficult to address this issue with purchasers who have never had a loan for anything other than their car or home. They often think that having excellent credit guarantees them getting loans at a low, fixed interest rate which is not the case. Many of these buyers experience restless nights with each increase in interest rate, which starts the "cold feet" process.
They start to examine an increasing number of inconsequential details and start searching for ways to either back out of the transaction or reduce the purchase price. However, we also encounter buyers of smaller businesses who are aware of the costs of doing business and are prepared to proceed in spite of slightly higher costs in the form of interest.
Conclusion An experienced business broker who often maintains a Certified Business Intermediary designation from the International Business Brokers Association can add tremendous value as well. They will insure that every buyer understands how the increasing rates will affect their actual post-transaction cash flow and debt service. Since these effects are typically negligible at a macro level, if explained in detail most buyers will choose to move forward. Send your buyers to a highly qualified SBA loan packaging professional for their pre-qualification letter (at no cost with Diamond Financial) to maximize the chances of success.
Do you remember in 1982 mortgage rates were approaching 18% and sometimes higher but people still bought homes because even at that rate it was more financially intelligent to buy than to rent (which is effectively 100% interest)? Same for today’s business buyer at ~9.75% interest it is almost always more financially intelligent to buy a business than to remain an employee.
So, get out those parachute pants and Member’s Only jackets and sign that closing package!
Jeff Snell ENLIGN Advisors (919) 624-1124 jsnell@enlign.com www.enlign.com
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