Business sales mirror homes

Finance remains tight for those wanting to borrow to buy themselves a business, and that may be contributing to a dampening of prices vendors can expect.

Two years ago, the banks were keen to lend to fund business purchases but prospective buyers now need to have a far larger deposit just as homebuyers do, said David Newport of the Switch Business business sales brokerage.

"Over the past 20 years, business banking has been a fairly low-risk activity," he said. "Businesses sold in that time for anywhere from three to four times Ebit [earnings before interest and tax] and the banks were lending an average of somewhere between 1.5 and 2.5. But, when times were great, a lot of those loans were for 100% of the purchase price."

Today, for a good business, finance is available to cover between 50% and 60% of the sale price, he said. Combine that with cautious buyers expecting bargains and brokers like Newport are facing tough times – although he said good businesses still sell in a matter of weeks.

At any one time there are about 2500 businesses on the market being sold by roughly 150 business brokers, who curiously operate under the same laws and regulations as real estate agents. A large number of these are in the "buy yourself a job" sectors of small retail such as cafes and dry cleaners. The boom and bust in business purchase finance mirrored home loan finance and the lending criteria tightened far more after the crash.

Only ASB did not offer 100% finance, Newport said. "The others were jumping over each other to it," he said. Where the banks were not interested, or would not lend as much as the purchaser wanted, there were always finance companies. But once "cashflow" loans were added, sometimes buyers could source 120% of a purchase price, Newport said.

Then, 18 months ago, the easy finance disappeared. The lack of finance up to and beyond 100% of the purchase price has thinned the herd of tyre-kickers, Newport said.

However, he believes the banks, which in hard times tend to focus on supporting current customers rather than seeking large numbers of new ones, are beginning to expand their business purchase finance books again.

"The banks have started ringing us again. That's a fairly reasonable barometer of where things are headed. That says they are back in the market."

Business brokers can make extra money by sourcing finance for purchasers, and it can help secure a sale.

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