Mistake #1 – Paying too much
This results from the combination of all the other mistakes. Many new business owners set themselves up for failure by paying too much, which results in higher loan payments, lower operating funds, and reduced borrowing capacity.

Mistake #2 – Letting your emotions rule
If you have always dreamed of owning a business, it is very easy to get caught up in the strong emotions invoked by seeing those dreams coming true. To counteract your emotions, take your time, do your homework, and enlist the help of objective advisors.

Mistake #3 – Paying for potential
You should only pay for the business as it stands at the date of purchase, not what it could be in the future. You will have to spend time, effort, and money to develop its potential. The seller chose not to invest in these things, so he does not deserve to be paid for them.

Mistake #4 – Not evaluating yourself
Do you have what it takes to run this business? Try to match your strengths to the important duties you will be required to perform. Running a small business requires the owner to do many things. No one can be good at them all, so make provisions for those areas in which you are the weakest. Some tasks like payroll and bookkeeping can easily be contracted to outside vendors. Possibly your spouse, other family member, or a partner could do things that you cannot or do not want to do.

Mistake # 5 – Not building a team of experts
At a bare minimum, you should enlist the aid of an attorney and a CPA. The attorney can prepare and review documents, help structure the deal, and make you aware of legal and liability issues. The CPA can provide a financial analysis of the business, and advise you about tax and accounting matters. You should also consider adding a business valuation professional to your team. His valuation report can be used to determine the reasonableness of the asking price, negotiate a lower price, and provide valuable information about the business, the industry, competition, and economic conditions.

Mistake #6 – Not verifying information
You should verify all important information about the business. Your CPA can check financial information like receivables, payables, and inventory. Your attorney can review loan documents, leases, and contracts. Your business valuation professional can analyze the competition, the industry, and the economic conditions. Use independent appraisers to value real estate and equipment. Get a credit report on the business through your CPA or banker. You can do some of the investigating yourself to save money, but do not cut too many corners – it may cost you in the long run.

Mistake #7 – Changing too much, too fast
Once you own the business, you will be tempted to start making wholesale changes from day one. You risk alienating long-time employees and customers. Unless the business is in bad financial condition and needs immediate action, its better to take some time to get to know the business, your employees, and your customers before making changes. This is a perfect time to solicit suggestions from employees and customers.

Mistake #8 – Buying a business because you like to do what the business does
One reason restaurants have a high failure rate is people buy or start them because they like to cook. Very few restaurant owners spend time cooking. Their time is spent managing staff, ordering supplies, doing paperwork, and handling daily crises. A small business owner must wear many hats – including that of manager.

Conclusion
Buying a business is a complicated, emotional process. By avoiding these costly mistakes, you can prevent turning your dream into a nightmare.

Courtesy of GlobalBx, October 14, 2009

The loan volume reflects all the small business loans approved by lenders that are guaranteed by the government under the SBA’s flagship 7(a) lending program. In addition to the drop in number of loans that were approved to small businesses, the total dollar amount also fell drastically to $9.3 billion total, falling short of last year’s total by about $3.4 billion.

Lending, however, appeared to rebound in the later part of the year, which the agency attributes to stimulus-related efforts. “We had a big finish to the fiscal year,” says SBA spokesman Michael Stamler. “Dollar volume for the [7(a) loans] in September was the highest recorded since August 2007.”

Broken down, the 2009 quarterly loan numbers (see interactive chart, at bottom) reveal the complete story of the year following September 2008, when Lehman Brothers filed for bankruptcy. The secondary market, where banks had typically sold their SBA loans to investors in order to initiate new loans, came to a standstill. According to the January 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices, about 70% of banks had tightened their standards on small business loans. As a result, the SBA backed 57% fewer loans in the first quarter of the year.

In February – six months into the fiscal year – the Recovery Act passed. The stimulus legislation dropped fees associated with the loans and raised the maximum guarantee on the loans to 90%, meaning that if the borrower defaulted, the government would reimburse the bank up to 90% of the loss.

Lending remained down in the third quarter of the year, the first full quarter following the stimulus. Top-tier lenders, including CIT and J.P. Morgan Chase, had reduced their small business lending considerably.

However, crediting the stimulus measures, the SBA reported that lending activity had started to pick up and that hundreds of lenders who hadn’t made a 7(a) loan in months had jumped back into the game.

“We saw many more banks increasing their SBA loans,” says Paul Merski, chief economist at the Independent Community Bankers of America in Washington, D.C. “The stimulus provisions helped jump-start the interest in SBA lending.”
Fast forward to the last quarter of the year, ended this week, where more than 15,000 loans totaling $3.3 billion were approved in the last three months – up 18% from the year prior and nearly hitting 2007′s quarterly levels.
“The real turning point was the Recovery Act,” says SBA spokesman Jonathan Swain. “When you look at the data since February, I think we can say that the Recovery Act hit the mark when it comes to SBA lending.”
The lending volume boost in the second half of the year was also due to the revival of the secondary market, which was supported by a program called the Term Asset-Backed Securities Loan Facility, or TALF.
The TALF initiative, which kicked off in March, allowed secondary-market investors to take out loans from the government to start purchasing asset-backed securities, such as SBA loans. Although investors have taken only a small amount of money from TALF to buy SBA loans, the program restored confidence in the market, which has since recovered.
“The TALF program had a very small but positive effect on the secondary market,” says Paul Merski, chief economist at the Independent Community Bankers of America in Washington, D.C. “[The market] largely corrected itself and credit started flowing more.”
That means more SBA loans are available for new business to get off the ground and for existing businesses to grow. Take Scott Harris, for example, who owns Catoctin Creek Distilling Company LLC in Purcellville, Va. with his wife, Becky. On Wednesday, the last day of the fiscal year, they signed on the dotted line for a 7(a) loan that will help them start their spirits business.

“We started looking at the banks in June,” says Mr. Harris, who credits the couple’s ability to secure a loan to a solid business plan, robust credit score and a significant amount in personal savings invested in the the business. The four-month waiting game has been “exciting and terrifying,” he says.
The couple procured the loan, which Mr. Harris says was for more than $100,000, with their local BB&T branch. The money will be split between startup purchases such as equipment, and working capital to grow the business.
Still, a jump in the year-over-year numbers doesn’t necessarily mean the trend will continue on an upward trajectory. While conditions are better today, the July 2009 Senior Loan Officer Opinion Survey shows that 36% of banks reported tightening credit standards for small firms in the last three months. Only 2% reported standards easing somewhat.
Furthermore, many lenders who historically have been stalwarts in the SBA lending arena remain hesitant to make small business loans. CIT, the top lender in 2008, has fallen to number 13 and is still teetering on the brink of bankruptcy.
“Where we are today compared to February is encouraging but no one in the administration will say we should declare victory,” says the SBA’s Mr. Swain. “Going forward one of the things we are doing with real urgency is looking at what is needed in marketplace today in terms of access to capital. The main focus is what we can do to keep moving in a positive direction.”
One measure that may help, says Mr. Merski, is pushing the end date for the stimulus programs. While the no-fee and 90% guarantee provisions are set to expire on September 30, 2010, the SBA estimates that funding is expected to run out by December, cutting the end date short. “[Lenders are] 100% behind extending the date as we’re turning the corner,” he says. “If they are pulled back in, we could have a dip in lending. I think that’s going to be a huge factor as to whether this strong uptick in the final quarter of 2009 will continue.”

Courtesy The Wall Street Journal, Emily Maltby

We see this trend even further enhanced by the “jobless recovery”, in other words, many well-to-do buyers are looking to buy themselves a job PLUS wanting to make a high yield investment. Indeed, it can be a very gratifying experience to run your own business, as a matter of fact, business owners consistently experience the highest overall well-being (see our blog – September 17, 2009).

However, we do live in difficult times as a buyer has to navigate the treacherous waters of buying the right company, and it will require very qualified advisors to review various investment options. Whereas in the past, the interest/talents of a buyer, available funds or networth and geographic preference primarily represented the key decision criteria, now there is the added challenge of sorting out which company’s sales/ profits will increase once the recession eases. In other words, many companies have declining numbers, top and bottom line, and the buyer needs to differentiate a business’ (permanent) structural deficiency from a (temporary) recession driven decline. Not an easy task!

For that matter, we are pleased to announce one of our workshops to be held on October 20, 2009 in Red Bank, and we welcome you to reserve your seat(s) for a healthy breakfast discussion.

NO GOODWILL CAP EFFECTIVE OCTOBER 1, 2009

Specifically, the SBA changed the rules for financing transactions involving goodwill:

a. If a transaction includes $500,00 or less of goodwill, a lender may process the loan using its delegated authority.

b. If the application includes more than $500,000 of goodwill and the borrower and/or seller have contributed a total of at least 25% equity, the loan also may be processed using a Lender’s delegated authority. (Seller equity is defined as seller financing that is on full standby (principal and interest) for a minimum of 2 years.)

c. If the loan amount includes more than $500,000 in goodwill and the borrower and/or seller are not providing at least 25% equity, then the application must be sent directly to the SBA for review and approval.

d. The amount of intangible assets financed with loan proceeds must be specifically identified in the Use of Proceeds section of the application.

WE CAN BRING THE SMALL BUSINESS BORROWER TO THE SBA PROGRAMS
Our company has a long history of successfully supporting financing requirements for our clients. SBA backed loans of $250,000 – $2,000,000 can be used to fund business acquisitions (goodwill), partner buy-outs, lines of credit (working capital) and certain small business applications. Our company can provide valuable experience toward securing this SBA funding for your business capital needs.

So why is Mr. Peugeot so happy? He genuinely likes fixing plumbing messes, for one thing, and despite the worst recession he has seen, “I’m still excited to get up and go to work every day,” he says. He relishes running into people at the local hardware store whom he has helped in the past. And in hard times, he says, his fate is in his own hands, rather than those of a manager. “Even when things get tough, I’m still in control,” he says.

In the broadest, most-comprehensive survey yet of how occupation affects happiness, business owners outrank 10 other occupational groups in overall well-being, based on the landmark survey of 100,826 working adults set for release today. Defined as self-employed store or factory owners, plumbers and so on, business owners surpassed 10 other occupational groups on a composite measure of six criteria of contentment, including emotional and physical health, job satisfaction, healthy behavior, access to basic needs and self-reports of overall life quality.
This puts Roger the Plumber well ahead of movers and shakers typically regarded as the top of the heap in society—professionals such as doctors or lawyers, who ranked second, and executives and managers in corporations or government, who came in third—according to the Gallup-Healthways Well-Being Index, a collaboration between Gallup and Healthways, a Franklin, Tenn., health-management concern. This is despite business owners ranking below those more-prestigious occupations in physical health and access to basic needs, such as health care.
The findings, psychologists say, reflect the importance of being free to choose the work you do and how you do it, the way you manage your time, and the way you respond to adversity. Regardless of occupational field, the survey suggests that seeking out enjoyable work and finding a way to do it on your own terms, with some control over both the process and the outcome, is likely for most people to fuel satisfaction and contentment.
“Despite the recession, it still pays to be your own boss,” says Frank Newport, editor in chief of the Gallup Poll. The survey, adds John Howard, director of the National Institute for Occupational Safety and Health, “reaffirms my view that the more control you have over your work, the happier you are.”
Smaller studies have shown links between certain kinds of stress and particular job roles or employment groups. But the huge size of the Gallup-Healthways project, which conducts 1,000 telephone surveys a day, makes it possible to draw detailed, reliable distinctions among a large number of occupational groups. “I know of no other survey of this size” on the subject, says Humphrey Taylor, chairman of the Harris Poll, a competitor. The 11 occupational categories surveyed also include farmers and sales, clerical, construction, installation and service workers.
Unlikely Winners
Business owners may seem unlikely winners. About half of the nation’s full-time small businesses typically fail within five years of start-up, and the rate has risen in the recession, says William Dennis, a senior research fellow with the National Federation of Independent Business Research Foundation. They are more likely to work extremely long hours than people in any other occupation group, other Gallup research shows.
The findings likely reflect declining quality-of-life in some professions, Dr. Howard says. Rising cost controls in medicine, for example, and mounting pressure to chalk up billable hours in law, have curtailed doctors’ and lawyers’ flexibility to control their work.
“Where professionals may have had greater freedom 20 or 30 years ago, many are now experiencing loss of control, erosion of satisfaction and increased stress,” Dr. Howard says.
At the bottom of the heap, transportation and manufacturing workers scored lowest on well-being. These occupations tend to foster conditions Niosh has identified as contributors to unhealthy stress: lack of control or participation in decision-making, conflicting or unclear job expectations, and hectic tasks with little inherent meaning.
Management and executive jobs have gotten tougher, too, during the period the Gallup-Healthways data were gathered, the first eight months of this year. Beset by cost cuts and layoffs, corporate bosses at all levels now share more of these stress-inducing conditions.
Business owners stand in stark contrast. Even in tough times, “you do your own thinking and no one can tell you you’re wrong,” says Edwin Locke, an industrial psychologist and professor emeritus of leadership and motivation at the Robert H. Smith School of Business at the University of Maryland. “You make your own decisions, and if you’re wrong, reality gives you the feedback,” he says.
Measuring Well-Being
In a study of how occupation affects happiness, business owners came out on top.

Occupation Overall well-being

Business Owner 72.5
Professional 71.5
Manager/Executive 70.9
Farming/Forestry 67.8
Sales 67.6
Clerical 66.1
Construction 65.0
Installation 64.4
Service 64.0
Transportation 62.6
Manufacturing 62.1

Source: Gallup-Healthways Well-Being Index

Note: Scores are based on respondents’ answers to six categories of questions about work and life quality.

Staying in Control
As a business owner, Mr. Peugeot says, “even when things are out of your control, as they are with this economy, you’re still in control of your relationships” with customers. Corporate managers and executives may “sit and wonder if they’re going to be laid off, or get frustrated with the inabilities of management,” he says. “If you’re the owner, you may have to say, ‘I screwed up,’ but it’s a lot better than saying, ‘I didn’t deserve that.’ ”
Other patterns among the self-employed help explain their psychological well-being. Entrepreneurs tend by nature to be optimistic, evidenced in their willingness to strike out on their own, psychologists say. Laura Street, of Pleasanton, Calif., isn’t making a profit in the handmade-jewelry business, Ampersand Designs, which she co-founded last year. But to her, the glass is half full: She says sales are rising, she expects to turn a profit soon, and she loves her work.
“Yes, the economy is bad. But we aren’t coming into a workplace wondering, ‘Are we going to get fired today?’ ” she says. “If you control your destiny, the well-being is something that just comes naturally.”
The freedom business owners have to control their schedules enables them to adhere more closely to their personal priorities, says Amy Neftzger, an organizational psychologist for Healthways. They have the flexibility to “make it to a child’s play, or spend time with family,” she says.
Golfing With the Mayor
Many also have community ties that feed a sense of well-being. James Barnard, chief financial officer of his family’s business, Barnard Manufacturing in St. Johns, Mich., didn’t have a great summer. He and his cousin Gary Barnard, president of the heavy-equipment parts maker, stopped drawing paychecks to help the company through a steep sales drop. They agonized over a decision to lay off dozens of workers, and Gary sat nearly alone in the plant for several weeks, answering phones.
But their company has a good image in the community, and “it’s a big deal to us to keep that going,” James says. He takes part in civic groups and enjoys golfing with the mayor and police chief. Pressed to describe the rewards of running a family business, he says, “It’s pride. Definitely pride.”
Another surprise from the survey: Farmers and other outdoor workers, from farmhands to forestry workers, scored No. 1 among all groups in “emotional health,” as measured mainly by the amount of smiling, laughter, enjoyment and happiness they report experiencing the previous day—despite the fact that farmers ranked near the bottom in access to basic needs.
Steve Swenka, a Tiffin, Iowa, farmer, had just finished mowing two fields of hay when I reached him by phone last week to discuss the poll. The results didn’t surprise him. Farm work, he says, is pretty trying. “When you’re out there in the heat and the dust, sweating, you may feel miserable,” he says. But over time, “you can see the progress, the fruits of your labor.
“And when the day is over and you see the loads of hay stacked, there’s something fulfilling about hard manual labor like that,” he says. “You forget your little troubles, and start to see the bigger picture.”
The Wall Street Journal, September

Whereas we would never claim to have that crystal ball, we can however, contribute a few recent observations out of our trade.

In terms of the economy’s direction, several factors point either way: on the “good side”, durable goods orders are way up for goods such as appliances, existing home sales were up by 7%, the stock market is way up, and cash for investments is plentiful available. On the “bad side” however, consumers are continuing to reduce their record debt levels, thus, inducing somewhat weak spending, surveys point to weakening business profit margins, and stocks are certainly no longer cheap. With no clear trend in sight, our firm believe is that the economy will eventually experience a slow recovery.

More importantly, though, is the question of personal life change and timing for a potential business buyer. The management of many mid sized businesses can certainly not exclude themselves from general macro economic trends, but the individual management talent and motivation more often overrules such broad based trends. Some of our (sell side) clients have convincingly demonstrated how to significantly outperform their peers in this environment, not only in terms of gaining market share but also in their financial performance. Significant adaptation in business methods to these challenging times have made them better companies.

Thus, the real question for the business buyer then becomes, does she/he see opportunity in a particular market and does she/he have the motivation, time and talent to turn/expand this opportunity into a successful investment by way of purchasing a business.

Taking that point of view, timing becomes somewhat of a secondary issue. As we had reiterated a few months back, many businesses generate good cash flow for the seller even during “bad” times, thus, the need to immediately sell taking a second rank. Yes, there are businesses with poor cash flow wanting to sell immediately which could represent an opportunity for a buyer, but if the low cash flow is a structural based issue will the cash flow improve then during an economic upswing, or is it merely a matter of the weak being sorted out during a down turn? Consequently, many “opportunities” during poor economic times are not really opportunities but merely represent a rude awakening during a better economic environment.

We have consistently worked with sellers who have proven that they can weather a storm and have been in business for many years and thus, can only encourage any investor – or business seller for that matter – to give us the opportunity to discuss their plans in detail with us. We have the experts on staff to provide a comprehensive review of your plans.

The deals are valued at $84.4 billion altogether, dwarfing the $20 billion figure from 2008. And they involve companies from virtually every nook of the U.S. economy, from auto-parts maker Delphi Corp., to retailer Eddie Bauer and hotel chain Extended Stay America.
In many of these cases, debt holders aren’t concerned about getting monthly payments, but rather using their debt positions to angle for ownership. It’s the equivalent of a bank making a loan to a homeowner with the intent of foreclosing on a delinquent mortgage. Such strategies have been around for years and are known in financial circles as “loan to own” or “vulture” deals. But never have they occurred with such volume and velocity, say bankers and lawyers.
Today’s lenders are “increasingly hedge funds who are thinking about a loan-to-own strategy,” said Barry Ridings, the vice chairman of U.S. investment banking at Lazard Freres & Co. LLC. At troubled companies that can’t pay their debts, boards find that ceding control to lenders is “the best way to maximize value,” Mr. Ridings said.
The deals are changing how Wall Street bankers and lawyers work. These days, M&A lawyers are increasingly collaborating with their firms’ bankruptcy practices and Wall Street restructuring shops. Rather than working with a suitor that wants to buy a company for cash or stock, they now work with groups of creditors who want to convert the debts into ownership of a crippled company. The new cliché among restructuring professionals: Bankruptcy is the new M&A.
That was on display in June, when hedge fund Elliott Management took bigger stakes in a loan used to fund Delphi while it was in Chapter 11 bankruptcy proceedings. That move effectively helped block other investors who wanted to take over Delphi.
Ahead of its June bankruptcy filing, theme-park operator Six Flags Inc. reached a deal with lenders, including Silver Point Capital and Beach Point Capital, to exchange debt for a 92% stake in the new company when it emerges from Chapter 11.
The opportunities for similar deals are likely to increase. Bank of America Merrill Lynch estimates that about $145 billion in debt could default this year, followed by about $130 billion next year and $120 billion the year after. Default rates are hovering around 10%, up from around 4% in 2008 and less than 1% in 2007, when credit was easy and the economy strong.
“This will continue for three to four years with all of the bank debt that comes due,” said Scott Levy, head of distressed mergers and acquisitions at Bank of America Merrill Lynch. “The absolute dollar value of projected defaulted debt is six or seven times as much” as in the recession of the early 1990s.
Some of the biggest turnover is in real estate. Maguire Properties Inc., one of the largest office-building owners in Southern California, said Monday it is giving up control of seven buildings due to “imminent default” on the loans backed by those properties. The company has struck a deal to turn over one of the buildings, which is located in Irvine, Calif., to LBA Realty, a real-estate company that bought its debt at a discount.
And unlike traditional deals conducted in secret, bankruptcy courts usually subject transactions to public scrutiny. Southwest Airlines Co., for instance, recently said it would offer a competing bid to take Frontier Airlines Holdings Inc. out of bankruptcy proceedings — after a judge approved an initial deal for the carrier to be bought by Republic Airways Holdings Inc.
Distressed deals often include hardball tactics. Earlier this year, Integra Telecom Inc. Chief Executive Dudley Slater met with Michael Leitner, a managing director at Tennenbaum Capital Partners LLC and significant holder of the telecommunications firm’s junior debt. Mr. Slater explained that Integra remained profitable, but that flat earnings meant a looming debt-covenant violation. Senior lenders wanted high interest rates to restructure the company’s $1.3 billion of debt. Today, Tennenbaum and other junior lenders are poised to own Integra, after exchanging $700 million of debt for equity stakes in an out-of-court restructuring.
Mr. Leitner said he wanted to work with stakeholders to do what was best for Integra’s capital structure. Turning the company over to debtholders proved Integra’s only recourse, Mr. Slater said. “Life is always better when you have options and in this case, we didn’t have options,” he said.

Wall Street Journal – Mike Spector and Jeffrey McCracken
August 10, 2009

While searching for an existing small business to buy, the novice entrepreneur will come across a few deals that seem almost too good to be true. There are times when a family situation or a dodgy medical condition may require a quick sale at a below-market price, but these are exceptions that come along rather infrequently. Uncovering the truth as to why a person has decided to sell his or her business is the first step one should take in the due diligence process – an effort that should be extended to all aspects of the pending transaction. But it is only the first step, as there are other red flags to be considered as well. Here are a few avenues worth exploring:

Employee unrest – What is the relationship between management and its workers? One of the best ways to ensure a smooth transition from one ownership group to another involves retaining those who work there. If a labor conflict has caused this relationship to deteriorate, a new owner may be stepping into a bad situation.

Competition – How does the target business stack up against its competition? Make sure that you’re not at risk for being edged out of the market due to pricing considerations or more aggressive marketing tactics. Also, where are those competitors located? A seller may be bailing out because a similar business is opening up across the street or down the block. You don’t need that kind of additional pressure so soon after taking over the company.

Changes in clientele – Has the business experienced a change in the number or type of customers it attracts? Even if sales have remained constant, is the business keeping up with a changing market? If not, revenue could be in for a speedy decline.

Profit & loss – What are the net earnings of the company? Do they compare favorably to the profit margins enjoyed by other firms in the same industry? Some owners may radically cut costs a few months before putting the business up for sale, which can artificially inflate the net earnings figure. Make sure to examine profit-and-loss statements that go back several years or more. If the margins have changed drastically in recent months, no matter in which direction, that should be a cause for concern.

Questionable assets – Exactly what is being sold in addition to the business itself? When companies change hands, oftentimes this involves a sale of assets. This could include equipment, real estate, inventory, and furniture, but it could also involve such intangibles as the client base, intellectual property (patents or trademarks), and goodwill. The intelligent buyer will obtain an independent valuation of each asset, comparing it to the price tag assigned by the seller. In addition, it is wise to ensure that all assets are specifically named on the bill of sale, so that there is no question as to what is included.

To be clear, 
one should not enter into the purchase of an existing small business with the expectation that the seller intends to cheat, steal, or lie. The vast majority of business owners are honorable, although they may be tempted to color any situation so that it comes out in their favor. Nonetheless, a skeptical buyer is a smart buyer. Never take anything at face value, and investigate every claim for yourself.

This is the time a professional, well experienced broker can help in providing the desired information to a buyer. In all likelihood, not only has the broker previously helped the seller preparing the business for sale, but a reputable broker also wants to continue working with a buyer and seller (either in form of more acquisitions or later on the sell side) and thus, has a vested interest that both sides are satisfied long after the transfer was executed.

…. Retailers that want to stay put are using the triggered clauses to negotiate multi-year rent reductions from their landlords, often in exchange for adding more years to their leases. Some cotenancy clauses allow retailers to pay lower rent if a mall or shopping center’s occupancy falls below a certain threshold.
Rent is among the biggest expenses for retailers. As sales continue to drop, the fixed cost of rent eats away at already thin profit margins. The average specialty retailer spent roughly 12% of sales on rent last year, up a percentage point from 2007. Citigroup estimates that the figure could reach 13% this year.
Reflecting a decline in revenue, Chico’s rent as a percentage of sales reached 10% in 2008, up from 7% two years earlier.
For commercial landlords, the cotenancy demands are one part of a miserable picture as they suffer through the current recession.
According to data released Wednesday by real-estate research company Reis Inc., the average lease rate at shopping centers — defined as open-air centers and big-box centers as opposed to enclosed malls — in the top 77 U.S. markets declined in the second quarter for the fifth consecutive quarter. In the 29 years it has tracked the figures, Reis says it has never seen a stretch of declines that long. At enclosed malls, average lease rates declined for the third consecutive quarter. Store vacancies are also hitting multiyear highs.
With a recent boom in the construction of open-air shopping centers — which depend on chains of smaller shops rather than department stores — many retailers insisted on adding clauses requiring that other key specialty retailers be signed as tenants, to ensure ample drawing power. As chains now either shutter stores or curtail expansions, use of the clauses is on the rise.
“We all sort of locked arms and said, ‘Let’s jump in the pool together,’” says David Zoba, senior vice president of real estate for Gap. “Now some of us are getting out of the water.”
The result is a ripple effect, as failures trigger cotenancy violations, which in turn lead to canceled leases, more vacancies and more violations.
Bankruptcies have led to many of vacancies. Last year, at least 27 major retailers filed for bankruptcy protection, followed by another 13 so far this year, according to BankruptcyData.com. Many of these companies, including Linens ‘n Things Inc., Mervyns LLC, Circuit City and Sharper Image Corp., eventually opted to liquidate, leaving vacant stores.
That can trigger cotenancy benefits for other retailers, says Matthew Bordwin, managing director at KPMG Corporate Finance LLC, which represents retailers looking to restructure their leases.

Courtesy: Wall Street Journal, Thursday, July 9, 2009

http://www.inc.com/valuation