Business broker William Lange knows firsthand how political and market turmoil can short-circuit deals in the lower middle market. Lange, a principal at San Diego-based Vanguard Resource Group, an affiliate of VR Business Brokers, particularly points to lending resistance from the Small Business Administration, a major component of lower-middle-market financing.
"SBA banks are reluctant to lend in spite of what they say and the criteria and scrutiny that they're placing on these loans," he says. "The criteria's been tightened, and the scrutiny is greater than ever before."
Lange typically works on deals that top out just under $30 million, he says, "though most of our sales are smaller than that."
Lately, business has been slow. "I can't help you with too many success stories in the past 12 months or so," Lange says.
Case in point: Lange was selling a franchise of a well-known, national fast-food restaurant with solid earnings in the "several-hundred-thousand-dollar-a-year level." He had a qualified buyer who had plenty of money, but lacked fast-food restaurant experience. "On the surface, one would think that this would be a relatively simple transaction to finance," he says. "It's a proven system across the United States. You've got corporate support. If you have a buyer with good credit, a solid background, he's going to be trained by the franchise. So we were very surprised."
Why? Because the SBA rejected the loan, telling several banks Lange had contacted that the buyer didn't qualify because he lacked at least five years of experience in the business. The buyer ended up walking away.
Lange speculates that generally banks are still wary of loans after the cataclysmic events of 2008. "The word on the street is that banks are sitting on trillions of dollars in spite of the bailout. Whatever the drivers are of the reluctance, it's trickling down into SBA lending."
(One possible factor: The Wall Street Journal reported in early October that $4 billion was sent from the Treasury Department through a Small Business Lending fund to 332 community banks to jump-start local lending. However, the paper said, 137 of these banks used $2.2 billion of the money to pay obligations from the Troubled Asset Relief Program back to Treasury.)
Lange says he's seen this issue come up in other sectors, such as manufacturing, and for companies trying to expand or move into new markets. "Some [lenders] are taking it to extremes. If you have a manufacturing company, great customer base, lots of revenues, a savvy sales and marketing executive who should be able to run it, the SBA should finance it. But they're saying, 'This company makes a Z widget, and unless you've made a Z widget before we can't [fund] you.'?"
Lange says recent developments are disheartening. "It's really unfortunate because early in the year we saw a very significant resurgence in small-business profits and small-business sales," he says. "It was looking good through the midpoint of the year, but all of a sudden things ground to a halt. I simply think there's fear out there as to what's going on with the economy. The small-business community is being impacted very, very heavily."