The other credit crunch

A great deal has already been written about the new mortgage rules.  Owner occupiers seem to have come to terms with the new lending criteria and have resigned themselves to the impact that they have had on the type of home that they can afford.

The impact of the new lending rules for buy to let landlords has yet to be felt but it is going to have a significant impact on the market and on the availability of homes to rent.  Personally, I cannot understand why a lender who is providing an absolutely safe loan for perhaps 50 or 60% of a property’s value needs to provide details of all their other properties and their personal income and expenditure, but this now seems to be mandatory.  One of my clients who has a £7 million buy to let portfolio and an income from his estate agency business of £650,000 per annum was recently asked by his buy to let lender how much he spent every month having his hair cut!  It seems as if the world has gone mad.

But there is another type of credit crunch that is going to have a real impact on the estate agency business and that is the near impossibility of borrowing money to buy a business.  I recently had a business sale delayed for nearly six months because the buyer could not raise finance.  He was buying a business at £2.75 million and had agreed to pay £1,375,000 up-front and the balance over two years.  The business was making profits of nearly £800,000 per annum, so the payments could easily have been funded out of cashflow.  He was paying £700,000 from his own savings and wanted to borrow another £700,000.  This was secured by a first charge against the business and a charge against his £1.5 million home.  He had thirty years’ experience in estate agency and the security covered the loan five times over but he was turned down flat by his own bank and by three other lenders before he eventually secured a loan via a specialist broker.  If the banks won’t lend to such a strong and solvent applicant, you have to wonder what purpose they serve.

We got this sale through in the end but plenty of other smaller sales have fallen through because credible and financially secure buyers have been denied funding.  This has been particularly true with sales-only businesses which the banks are even less keen to lend on.  This is a tragedy for the business owners involved.  Many of them have worked hard all their lives to build a successful and profitable business in the expectation that they would sell it one day to finance their retirement.  Now they find that through no fault of their own, they cannot do so.  Even partnerships are being affected because the incoming partners are not able to raise funds to buy the retiring partners out.

So, what can you do if you find yourself in this position?  Your first step should be to ensure that the buyer approaches a specialist finance broker instead of going to their own bank.  A good broker should be able to give their client a good idea of how much finance is going to be available, the security that will be needed and the likely interest rate and repayment period.  If it is not going to be possible to raise funds, it is best if this is established before time and money has been wasted on legal fees.

If finance is not likely to be forthcoming, as a last resort, you may consider lending the money to the purchaser yourself by way of a deferred payment repayable over perhaps two or three years.  This is not ideal but the loan can be secured on the business in addition to any other security that the buyer may be able to offer and it may be a better alternative than postponing the sale.

You might be tempted to put a manager in to run the business for you on a salary or sell part of the business and retain the balance.  Based upon many years of experience, I would urge caution with both these options.  In my experience, managers often become resentful if they do all the work whilst the owner gets most of the money and this resentment can make them lazy, sloppy, greedy, dishonest or some combination of all of these things.

A sale of part of the business may seem tempting but all too often such arrangements end up in arguments about how the business is being run by the new shareholder/manager and how the profits are calculated and distributed.  You should also bear in mind that you will remain liable for any fines that the business might incur through poor compliance or other breaches of legislation.  These can be very significant.

This problem is not confined to the estate agency business.  Tens of thousands of baby boomers who started businesses in the 1970s, 80s and 90s are now reaching retirement age.  It would be a tragedy if these profitable and successful businesses which collectively employ hundreds of thousands of people were to be shut down simply because the people who are willing and able to take them over are unable to raise the necessary finance.  I sincerely hope that the present scarcity of business finance will be short-lived and that the banks will learn to assess the risk more accurately so that they can make better lending decisions and support businessmen who deserve it.

Adam Walker is a management consultant, business sales agent and trainer who has worked in the property sector for more than twenty-five years.