When lenders aren't lending

Dave Wiggins wants to buy a small company. The former president of a $55 million company, he sent business plans to six banks. All said no.
Dave Wiggins wants to buy a small company. The former president of a $55 million company, he sent business plans to six banks. All said no.
Posted: November 17, 2008

Credit markets are frozen these days and in Medford, David Wiggins is feeling an uncomfortable chill.

A former company president accustomed to leading a $55 million business with 200 employees, Wiggins, 57, wants to buy a small manufacturing business priced at under $5 million.

"I can't get financing," Wiggins said.

In mid-September, just as the Lehman Bros.' collapse pushed the economy to the precipice, Wiggins shipped business plans to six banks. All six passed.

Major acquisitions - Wells Fargo & Co. buying Wachovia Corp., Bank of America Corp. buying Merrill Lynch & Co. - grab the headlines. But much of the business buying and selling in America involves small deals: a water-ice franchise, the neighborhood grocery or a small manufacturing company like the one Wiggins wants to buy.

And those businesses are barely moving, or if they are, the deals are much more complicated now.

"Banks have almost totally frozen up," said Steven Rosen, president of Sunbelt Business Brokers of Pennsylvania, a franchise in Blue Bell.

"There's a big difference in how deals are being done in the last few months," said Rosen, who heads the Pennsylvania Business Brokers Association and FranNet, a national network of franchise brokers.

The deals are smaller - down, in Rosen's case, to an average of $90,000, rather than $150,000.

Sellers are having to finance more of the deal and agreeing to longer payouts, Rosen said. And, he said, more deals have to go through the Small Business Administration's program to back loans made by banks.

Even SBA activity is down due to decreased bank lending, said Lynn Ozer, a vice president at Susquehanna Bank and an expert in SBA loans.

"Every other time there was an economic downturn of any magnitude, SBA was busier. It was countercyclical," said Ozer, who trains lenders on SBA regulations.

"When the banks' credit boxes got smaller, my [SBA] world got bigger because this was a way that banks could still extend credit."

It's never easy for entrepreneurs to get loans to buy businesses, but Ozer and area brokers say it's particularly hard now.

"Everybody's risk appetite has got a noose around its neck," said Ozer, even though her bank is still lending, albeit cautiously. "These economic times scare even risk-taking types like me."

Even if a lending banker has confidence in the person and the individual business, bankers are afraid that whole categories of business could fail. "What is the next industry that is going to get hit," she said. "I've never had a year like this in my life."

Buyers, too, are in short supply.

"Buyers are frozen in fear," said Ron Hoxter, president of MidAtlantic Business Brokers Association, and Mill Creek Partners, a business broker in Conshohocken.

Typically, he said, 75 buyers a week call his office looking for deals. Now it's down by at least a third.

In the best of circumstances, he said, making the leap from employee to entrepreneur "is scary in and of itself," he said. "Now you are [also] buying a business in a tough economy."

Rosen said he was seeing more of the unemployed among the ranks of potential business buyers, partly because they may be able to use severance money to fund a business. "We are even seeing people who have retired and they are now saying they are going into business."

Other factors - declines in home equity and 401(k)s, the election and nuances in government-backed loans - are contributing to the slowdown.

Business buyers used to be able to build deals around equity in their homes. "But home equity loans are down and the equity itself is worth less," Rosen said. On Aug. 1, the SBA tightened regulations related to home equity.

Business buyers also used to be able to tap into 401(k) plans without incurring early-withdrawal penalties. "The mechanism is still there, but 401(k)s are down," Rosen said.

Even though SBA loans are relatively safe for a lender - 75 percent of the loan is guaranteed by the U.S. government - banks are less eager to write the loans, Ozer said.

Many banks like to sell the secured part of the loan to investors, giving the bank more money to lend. But fewer of these secondary sales are happening because investors' liquidity is so limited that they are not even buying the SBA-backed loans, she said.

An unfortunate, but predictable coincidence has less to do with the current state of the economy, Ozer said. "In an election year, lending is always less than normal" as lenders assess the implications of the outcome.

Encouraging, she said, is President-elect Barack Obama's willingness to raise the amount that could be borrowed through an SBA loan.

Obama's promise to raise taxes on capital gains may be "a factor that is pushing people to sell now," despite the market, said William Doyle, president of the Bridlebrook Group, a business brokership in Broomall.

Doyle said sellers may also be worried about the economy and eager to unload their businesses while they can. Just like the housing market, prices are down, if a buyer can put up a lot of cash, Doyle said.

Otherwise, it can be a tough sell.

One of Doyle's clients has listed his Montgomery County beer distributorship for sale since February.

"We've had a couple of people come to the table," said the owner, who asked that his name not be printed because he doesn't want competitors to know he is selling. "Some of them have gotten scared because of the financial situation."

The distributor has a job waiting for him as the chief executive of a start-up in the cosmetics industry - a field he left in 2007 to pursue the dream of business ownership.

Now, he sees a bigger opportunity in cosmetics.

"In the beauty business, they are much more creative, they are very left-brain.. . . They are fun people to be around," he said.

"You could do a sitcom on the regular customers who come in here," he laughed. He said the beer business is down, but profitable.

At first, he didn't want to lend money to a buyer, but now he said he thinks it's inevitable if he wants to move on.

In Medford, business buyer Wiggins is also stuck.

"One of the problems is that I'm 57," Wiggins said over a cup of tea at his kitchen table. "I'm in a C-level position and there aren't many people looking to hire C-level people at my age."

"That's one of the reasons I came to the conclusion - 'Hey I'm tired of working for other people. Why don't I try working for myself.'"

In March, he left his previous job with the idea of buying a business. He found the woodworking company and signed a letter of intent. His plan included putting $300,000 in cash into the deal. The business' land, buildings and equipment would help back the loan.

As recently as a week ago, he had hoped the last of the six bankers would lend him the balance, but he was turned down.

Since then, Wiggins sent out three more proposals and he has a meeting with one bank next Monday. To keep himself occupied, he designs and builds furniture in a workshop in his garage.

Two banks are still talking to him. He's hoping to persuade the seller to drop the price, and he's trying to avoid encumbering his house. His wife, Betsy, is job hunting.

"I'm bitter at the way the banks and the government have put us into this position," Wiggins said. "Because they didn't keep the rule book open and lent to people who didn't deserve it, they have literally ruined the world economy."

Contact staff writer Jane M.

Von Bergen at 215-854-2769 or jvonbergen@phillynews.com.

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