What’s Happening in the West Michigan Business Brokering Market Right Now?

wmiskylineThe real estate market in West Michigan has been bouncing back, and, as residents and homeowners, we are seeing properties move faster and at higher selling prices than we could have imagined just a few years ago. But what is the market for businesses in the area? Are entrepreneurs seeing the same kind of opportunities? A fluid and efficient market for businesses is important for the economic well-being of the area as it facilitates choice and free movement and encourages the participation of new entrepreneurial blood.

Calder Capital has developed relationships with Small Business Administration preferred lenders in the area, and, based on their responses, we feel confident that the “pulse of the marketplace” is beating more robustly these days. Here are some questions we have been hearing from business owners in the area, as well as our take on what’s happening in the business brokering market right now.

Can you discuss credit scores and the impact that they have on a buyer’s ability to obtain SBA or conventional financing?

SBA lenders have eased their standards on this a bit as we have moved more into a recovery position since the onset of the Great Recession.  Most lenders still have a minimum score for working with them, but that has gone down over time as they’ve become more aggressive in this competitive lending environment.  SBA does not and has never had a minimum credit score they have worked with.  If there are credit issues, they simply want them explained.  If that’s done well enough, usually SBA will not hold a bad score against them.  A bad credit score is somewhat mitigated by other various positives in the whole lending package, such as good collateral, experience on behalf of the buyer, and liquidity.

How do lenders judge the bankability of a going concern business? How does this vary based on industry?

In a business purchase situation, SBA lenders look at a few issues.  First, they want to make sure the buyer isn’t paying too much for the business – they do this through appraisals, for both assets and goodwill.  Secondly, and it’s really a function of the price of the business too, they look at cash flow coverage over a reasonable term at a market interest rate.  When they can get to a debt coverage ratio of 1.2X historically (not based on projections), they feel confident that this is a good deal.  Of course the more collateral the better, to ease the minds of the lenders, but SBA is not a collateral-based lender, which is why these loan products (SBA 7a) are used to finance many business acquisitions.  While SBA doesn’t have credit score minimums, they are hoping for good personal credit on behalf of the buyer, along with reasonable liquidity.  Reasonable liquidity would be at least 10% equity into the project with some left over for personal needs, which varies by buyer.  Banks like to see more liquidity in general than the SBA requires.  And that brings me to my last point – lenders tend to look at all the aspects of these loans a bit more conservatively than SBA will.  And that’s important to keep in mind.  Usually if your lender approves you to move forward, SBA will likely approve the loan.  These issues are true across just about every industry.

Are there certain industries that are more appealing than others when it comes to financing a business acquisition?

To bankers, the most appealing industries are the ones buyers are interested in, and the ones sellers are bringing to the table!  Coming out of the Great Recession, manufacturing has really done well for various reasons.  Most other industries are also doing better, but not to the same extent.  However, due to the manner in which businesses are priced, all of these factors are figured in when assessing value and going for financing.  And most ‘deals’ have been wrung out of the system, so there’s not many cheap businesses for sale out there anymore.  So it’s really up to the buyer as to what is the most appealing.

Does the condition of the local economy impact bank lending standards?

Absolutely.  Bankers are now participating in an increasingly aggressive business lending environment in West Michigan (and really, around the country as a whole).  Standards are being relaxed in many areas as banks compete for the business out there.  This is a constantly evolving atmosphere, however, and next year will bring its own new set of opportunities and challenges for local banks.  And yes, down the road we will have another recession when bankers far and wide will ask each other and themselves why they made certain loans – having forgotten what they were thinking at the time.

What has changed during the past 6-12 months? Any predictions as we move through 2015?

Again, bank lending standards are relaxing across West Michigan and our state in general, if not the country as a whole.  Speaking specifically to business acquisition financing, this has by and large been a very good thing over the past year.  As standards continue to relax, the door to business ownership is opening to a larger swath of the population – most notably those who thought they simply didn’t have enough liquidity to buy the business they wanted in the past.  SBA loans help with this too, but lenders are starting to more aggressively use the SBA products to craft structures that they likely would not have offered a few years ago.  Of course, this also has a flip side, which we are starting to see as well – as money becomes more available, business pricing is going up as well to accommodate that availability.  This can only happen so quickly, but it does appear to be happening.  During the Great Recession, many, if not most, businesses were being sold for their asset value alone – no goodwill whatsoever.  That’s really changed!  Bankers see 2015 as a great year in general for both buyers and sellers, although this might change after 2015. It’s hard to predict too far into the future with accuracy.

What is the current state of the West Michigan economy?

Our local economy here in West Michigan, and to some extent across the southern part of the state, is very healthy and growing quickly – too quickly. Help wanted signs are everywhere. If you don’t have a job in West Michigan currently, you probably don’t really want one. But the downside for employers is going to be wage inflation.  We’re already seeing this in some industries and some professions.  The Governor has insured we’ll have at least a bit more with minimum wage increases built-in to our future over the next few years.  All of this will lead to few negatives for all of us – asset prices will increase (housing being chief among them), goods and services will increase in price and we’ll all have to put up with the downside of full employment – dealing with unqualified and unmotivated employees at the stores where we shop daily.  What this means for businesses wanting to sell is a bit more serious.  Most businesses count labor costs among their largest expenses, and wage inflation will only exacerbate that further.  So…if business owners are reading this, note that 2015 may begin a time when wage inflation starts to erode your earnings a bit – making this a great time to sell a business before the real effects of this kick in over the next few years. Lastly, as many have predicted, we’ll also likely see the Federal Reserve start to increase rates in 2015, if not at least threaten this action.

How long does it take a buyer or seller to get financing for a business sale?

In the last 20 years SBA’s processing times and banks’ turn-around times have varied greatly.  In general both lenders and the SBA are much faster at working their respective businesses than they used to be.  Depending on the size of the project, and, generally, the larger it is the slower it goes, many buyers can expect to close a business purchase in about 2 months time.  If real estate assets are included, that stretches a bit to about 3 months.  This timeframe would be from the point of sitting down with the lender who will finance the project.  They may have more time invested finding the lender who wants to do it.

What are the key things that qualifying an SBA buyer candidate?

Usually SBA is looking for a willing and able candidate – someone with at least 10% equity to put into the project and hopefully with some direct industry experience, or transferable experience.  There are ways around each of these issues, but these are the general requirements SBA likes to see.  A good credit score also helps a lot, but again this can be mitigated by other positive factors.  As they like to say in commercial lending – you can cut one leg off the table and it will still stand, but you can’t cut much more!  So, if a buyer is missing one key element, often they can still get approval, but if too many pieces are missing, there’s likely no way they would be qualified by the lender or SBA.  Thankfully we have a lot of willing and able buyers in West Michigan and are seeing a lot of good business acquisition activity currently.

We also asked Tim Mroz of The Right Place to weigh in about his view of what going on right now in West Michigan, and this is what he said:

What is the current condition of the West Michigan economy? How has this changed in the past year? In the past six months?

West Michigan’s overall economic condition is very good. Companies are continuing to invest, hire, and expand. Our region’s unemployment rate is the lowest it has been late 2005. The past 6 to 12 months have not had any huge shifts…just more good news and arrows going in the right directions. Anecdotally, we were proud to announce West Michigan’s first major foreign direct investment (FDI) from China with the announcement of Dicastal North America moving into the former Uni-Solar facility in Greenville.

What is the outlook for small businesses? Is employment expanding? How easy would it be for a business seller or owner to access the necessary credit to open a new business or sell an existing one?

We don’t really work with small businesses all that much. Most of that work is concentrated at SBDC and the GR Chamber. Yes, employment is expanding (see above). Credit lines are getting easier, but certain credit lines are still tight. However, if it helps, this is not a problem specific to West Michigan…this is happening across the country. The only difference in West Michigan and other communities our size is the lack of available credit alternatives (angel funding, crowdfunding, venture capital, etc.).

What is the outlook for 2015 for small businesses? How easy would it be for a business seller or owner to access the necessary credit to open a new business?

Similar to the answer above. I’m not a credit expert, so can only comment on what we are hearing.

Discuss employment in West Michigan. We have heard that manufacturers are having a very difficult time recruiting skilled labor. Where are you seeing tension and bright spots locally?

It’s not just manufacturing. Outside of healthcare, almost every industry is clamoring for talent (manufacturing, IT, software development, professional services, etc.). With unemployment dipping below 5%, you’re going to see this problem amplify. The available talent simply isn’t there. From here we have two options: invest in more programs to better train and educate the talent/labor here in the region, or go outside the region and try to recruit new talent. For us, it’s not an either/or proposition, but instead a both/and opportunity.