Dynamics of economy influence small-business sales

A few months before last fall's economic meltdown, Rob and Lisa Eagleburger decided they wanted to buy a small business.

"With the way the stock market was trending, our money was safe," Rob Eagleburger recalled feeling. "We had something to do with whether our money grew or whether we lost our money by being a business owner."

With the help of First National Business Corp. broker Jerry Myers, the Nixa couple poked around a plethora of businesses on the auction block, including a sandwich shop and tuxedo rental store. They eventually found what they were looking for in B&C Glass Co., a Nixa business that installs glass for commercial storefronts as well as shower doors and mirrors for residential customers.

Longtime owners Neal and Louise Coons, of Springfield, accepted the Eagleburgers' offer in August. The sale closed for an undisclosed price in early October, just when Congress approved a $700 billion taxpayer bailout to prop up the country's flagging financial system.

The Eagleburgers have certainly heard a thing or two about the timing of their entrée into entrepreneurship.

"When you say, 'We took over the business in October,' you'd be shocked how many people say, 'In this economy? What were you thinking?'" Rob Eagleburger said. "We're very tickled with the business. We're growing."

Myers said buyers like the Eagleburgers have been "crawling out of the woodwork" in recent months. Some are longtime employees of larger companies who have been laid off or are facing corporate downsizing. Others just want more control over their future earnings.

"There are just so many (people) saying, 'I want a business, and I want it right now,'" Myers said. "They can usually give themselves a raise by buying a business."

The supply of small- and medium-size businesses, though, isn't meeting the demand, and Myers said sellers of well-run companies are reaping the rewards. The Coonses, who are now retired, sold B&C Glass to the Eagleburgers for 2 percent more than the list price, he said.

"Businesses are selling in the upper range of their values right now," Myers added. "A good business that's profitable will be worth more than the assets."

Gary Rogers and Chuck Woolley, co-owners of Kingsley Group Business Brokers, said companies with good management, strong cash flow and low debt are commanding premiums, although tightened lending standards at banks have resulted in more owner-financed deals.

"The sellers, who worked years and years and years to build their equity in their business, are going to be asked now to be the bank," Woolley said.

Recently announced changes to U.S. Small Business Administration lending programs favor buyers, Rogers said, citing the temporary waiver of SBA loan-guarantee fees and a $250,000 tax write-off for new equipment purchases this year.

On the flip side, Woolley noted, business owners thinking about selling were penalized by a new SBA rule that limits "goodwill" financing to 50 percent of the loan amount or a maximum of $250,000. Goodwill is the value of a company's physical assets.

"Small businesses - like big businesses - have a big piece of value based on goodwill, and they're unwilling to finance very much of the goodwill," Woolley said. "That's going to be a hurdle for both the buyer and the seller."

Despite Myers' comments about a glut of buyers, Rogers thinks a fair number of qualified buyers are still sitting on the sidelines. He anticipates more of them will step onto the playing field in coming months, but he said some just aren't feeling flush.

"A lot of our buyers in the past have used their retirement funds in some of their transactions," Rogers said. "What's happened in the last six months is their 401(k)shave become 201(k)s. ... Their purchasing power is down."

Myers said some insurance providers allow certain policyholders to borrow money from their qualified retirement plans for a business purchase with no tax consequences.

But there is a downside to the plans, which require an upfront cost of about $5,000 and ongoing administration fees. Additionally, he said, the entity formed to purchase the business must be a C corporation rather than an S corporation or limited liability company, which opens the door to double taxation.

Business brokers who spoke with Springfield Business Journal agreed that local business owners contemplating a sale - one in five at any given time, according to Myers - shouldn't assume that the recession has scared off all interested buyers, but they said construction-related businesses are at a disadvantage.

Myers said buyers are calling FirstBiz every day, and Kingsley Group is forecasting a banner year.

"With the economic climate the way it is, we expect '09 to be probably the biggest year we've ever had," Woolley said.

Owners thinking about selling should consult a broker prior to listing their business, Rogers said.

"Historically, we find that owners of very good businesses tend to wait longer than they should to position their business for sale," he said.This story has been corrected. It originally said the Eagleburgers purchased B&C Glass for 10 percent above the list price.