Jeannie Naujeck writes in the Nashville Business Journal that business brokers nationwide and in Nashville, TN; see major decline in sales of small businesses. Small business owners are holding off on selling their companies as they wait for a more favorable market when they can make a profit, and have a more qualified pool of buyers with cash in hand.

Business brokers say their business of connecting buyers and sellers is down by as much as 50 percent because of a lack of financing on the part of would-be buyers, and a desire to wait until valuations are higher on the part of sellers.

“If you’re in business right now, you’re focused on surviving, not selling,” says Mike Handelsman, general manager of BizBuySell.com, an online marketplace for owners and brokers. “On the buy side, there are a lot of potential buyers who may have lost their jobs and may be looking to get into business. But they’ve lost a lot of personal savings, so they have less capital to invest, and there’s a liquidity crisis — banks aren’t lending money unless you don’t need it.”

Mike Hankins purchased a WIN Home Inspection franchise through a broker about two years ago. Hankins, a 25-year restaurant industry veteran whose last job was owner-operator of a Stoney River Steakhouse, says he was looking for a business that would allow him to be home at night.

“I was just looking for a business that was profitable,” Hankins says. “The financials looked good, and I’m a handy person, so I felt like this would be one I could pick up easily.”

But over the four-month process it took to buy the business from its former owner, sales began declining rapidly — partly because of the owner’s marketing slowdown and partly because real estate sales went into freefall.

By the time he bought the business, sales dropped in half, he says. In his first year overall, sales were off 40 percent. That did, however, help him achieve a lower final purchase price than when the process started with the seller.

Although Hankins says he probably could have gotten a bank loan, the owner agreed to finance a three-year loan, helping to ensure the sale.

“At that time when everything was going down, mortgage companies were going under and it was tumultuous,” Hankins recalls. “It was easier this way.”

The seller does get a percentage of profits if sales hit a certain mark, he says, and his broker, Bren Letson, says that’s the kind of creative financing that can help move a business when transactions are stagnant.

Bizbuysell.com, the largest of the online sites which lists both private businesses and franchise re-sales, with restaurants the biggest category, followed by auto services and retail stores. In the second quarter of 2009, the site had about 48,000 businesses for sale nationwide, compared to 52,000 at the same time last year. Closed transactions are down 50 percent; median sale price is down 20 percent.

The numbers appear to confirm a downward trend, coming after a first quarter year-to-year decline of 36 percent off first quarter 2008 numbers.

“All metrics are down,” Handelsman says, including multiples of revenue — down 2.5 percent — and multiples of cash flow — down 8 percent — on which pricing is usually based.

In the second quarter of the year, 11 listings in Middle Tennessee sold, compared to 13 a year ago. The median sales price was $200,000, or about 84 percent of the list price.

Businesses that are moving on the site include health care related businesses such as ambulance services, he says. However, no indicators seem to show any uptick in the economy.

The median asking price for businesses for sale in the Nashville area was $350,000 at the end of the second quarter, up from $300,000 a year ago. Second quarter data was based on 227 Nashville-area businesses listed at BizBuySell.com.

However, the second quarter data listed businesses in the Nashville area had a median revenue of $500,000, up slightly from $497,675 at this same time last year. And the median cash flow, meaning the money that comes out of the business over the course of a year, is $114,000, versus median cash flows of $107,500 last year.

According to BizBuySell.com, business owners in the Nashville area will typically ask for, on average, a revenue multiple of 1.01 (changed from .95 year over year) and a cash flow multiple of 4.03 (changed from 4.05 year over year).

“Businesses are valued by the cash flow they generate, so when revenues are down so is cash flow,” says Bren Letson, owner of VR Business Brokers Nashville. “That’s why business owners are waiting.”

Letson says businesses should focus on providing needs, not wants.

Nashville Business Journal