01 Aug Seller Finance Keeps US Market Resilient, Buyers Give Views on Crowd Funding
Nearly eight times more US business buyers expect to use seller financing than prospective UK purchasers, according to a BusinessesForSale.com survey of hundreds of buyers, sellers and brokers.
Asked how they expected to fund a purchase, nearly one in three (31%) US-based would-be buyers said they hoped to obtain a loan from the vendor, compared to fewer than one in 20 (4%) of their counterparts across the Atlantic. At 15%, the worldwide average was also much lower.
Buyers in the US market clearly expect sellers to be rather more accommodating over deal structure. That seller finance, which burdens the seller with the risk of not recouping the entire sale price, should be common in a nation renowned for its entrepreneurial culture and all that entails – namely embracing risk and tolerating failure – is unsurprising.
A failure to conjure cash, brokers will know, lies at the root of many failed business sales. A refusal to consider deferring part of the consideration and other forms of inflexibility – such as staying on post-sale and a willingness to lower the price – hampers a significant portion of business sales, according to 58% of business brokers.
Bridging the gap between what risk-averse banks are willing to fund and what sellers expect to recoup, it’s also no surprise that most brokers report that vendor finance has become more extensively used since 2007. In a 2012 survey by BusinessesForSale.com, 37% agreed to some extent and 29% strongly agreed that owner finance was more common since the subprime crisis that triggered a global slowdown, while only 5% disagreed to some extent and 6% strongly disagreed. The other 23% identified no discernable change over the five-year period.
Meanwhile, crowd funding, a Silicon Valley buzzword, has apparently yet to penetrate the consciousness of the business world in general; 61% of business buyers confess to not even being aware of its existence.
That 17% of buyers have considered using crowd financing, which is generally associated with high-growth tech start-ups, is surprising only insofar as you might expect the figure to be much lower. Interpret the stats another way and the figure is more startling still: nearly half of those buyers who have heard of crowd funding have considered using it.
Business brokers are rather more familiar with crowd funding, where money is raised online from numerous small investors instead of a handful of high-net-worth individuals or organizations. Fifty-five percent of intermediaries are aware of the concept.
Remarkably, 12% of prospective buyers claim to have used, or expect to use, crowd funding to finance an acquisition.
But examine the biggest platforms, such as Indiegogo and Fundable, and you won’t find any business-sales projects (I stand corrected if you can); the emphasis instead is on innovative start-ups or established businesses looking to expand.
Many buyers hitherto unaware of crowd funding were keen to learn more (the concept having been explained in the question). “Seems like an excellent way of generating finance – would like some more information on this please,” was a typical response.
Others were unconvinced, however. “A fad with no use,” scoffed one respondent.
But the naysayers’ tone (“How do you know it’s safe?”) was redolent of early objections to online shopping when many people refused to entrust their credit card details to cyberspace.
Regulatory hurdles are a bigger issue than a fear of the unknown. Investors are still waiting for the Securities and Exchange Commission to formalize the rules governing crowd funding under the JOBS Act.
While crowd funding has captured imaginations, a securities lawyer has sounded a note of caution. “As a result of significant amendments on the Senate floor, crowd funding emerged in the final version of the JOBS Act with a much heavier set of regulatory, legal and procedural burdens than what had been originally proposed,” wrote Brian Korn of Pepper Hamilton in Forbes. “Regardless of the SEC’s upcoming rulemaking process, these statutory requirements effectively weigh it down to the point of making the crowd-funding exemption under the JOBS Act utterly useless.”
Thirty-seven percent of business brokers polled considered crowd funding a useful tool in raising acquisition finance, while 39% thought it should be used more frequently in business sales and 43% agreed with the statement: “Ongoing credit problems makes crowd funding ideal for buyers; low interest rates for savers mean there are plenty of willing investors too.”
However, some brokers noted that it was more suitable for tech-based start-ups rather than other sectors or acquisition finance. Another intermediary feared that the “concept could easily attract a lot of con artists.”
One broker thought its use would amplify pressure on the buyer: “When there are too many investors expecting a reasonable return it places pressure on the business acquired from day one.”
An exciting concept, undoubtedly, but crowd funding is unlikely to displace traditional forms of finance any time soon.
Asked to indicate their level of preparedness for buying a business, 41% of buyers described themselves as ‘serious’ about making an acquisition with funds in place.
A further 33% said they were “confident I can raise the cash I need, though I will only buy if I find the right opportunity.”
Only 22% lack confidence in their ability to raise finance, of which 10% said “I’m determined to buy a business though I fear that a lack of credit might prevent me from buying” and 12% were unsure of their ability to “raise the cash or find the right opportunity – but I’m going to try”.
The other 5% of buyers were just browsing for the time being.