Atlantic Highlands, NJ, December 9, 2010 – A Neumann & Associates, a well-known New Jersey business brokerage company, has announced a slight uptick in the number of existing business transfer deals this year, and a dramatic shift in the type of funding used to finance these deals.
The number of businesses bought and sold has remained mostly stable during 2010. Approximately 1,117 U.S. small businesses were sold during the third quarter according to BizBuySell.com. The difference is that the seemingly easy access to funding from friends and family has slowed.
“The majority of entrepreneurs, particularly first timers, tend to reach out to ‘friendly money’ after realizing they don’t have enough equity to purchase a business or after tapping out their savings and credit cards,” according to Achim Neumann, President of A Neumann & Associates, New Jersey. “In the past we’ve seen the lion’s share of funding come from friends and family; this is no longer the case.”
Many small business transactions are funded through conventional small business loans or angel investors. However, it seems that as banks have tightened up loan requirements in lock step with the grey economy, so relatives are following suit. This traditionally ready-made source of interest-free loans is getting harder and harder to come by, while simultaneously demanding more accountability.
As part of a survey conducted at Pepperdine University this fall, 35% of 388 U.S. entrepreneurs polled said they have funding from informal investors – down from 56% of entrepreneurs polled in the spring.
With the economy in the news daily, and business closures part of day-to-day conversation, the higher risks of starting a business are now glaringly obvious as compared to buying an ongoing business. As ‘friendly money’ becomes less accessible, entrepreneurs are seeking creative financing options. And relatives are viewing these loans as they would any other investment, looking for real return on their money.
This conservative trend seems to have hit every sector, particularly entrepreneurs starting businesses from scratch. According to Neumann, “With an existing ongoing business, entrepreneurs take on less risk with a proven model, and they get better financing, an established cash flow and a higher probability to succeed.”