CAMPGROUND SALES IN A HIGHER INTEREST RATE ENVIRONMENT

The good news about RV Park and campground sales is that activity is picking up. As a nationwide SBA lender specializing in SBA financing for campground acquisitions, I was very busy in 2021 and 2022. Activity really slowed in 2023 after the market was rocked by higher interest rates. Small business borrowers typically borrow money at interest rates tied to a spread over the Wall Street Journal Prime Rate. During 2022, following increases by the Fed in the Federal Discount Rate, the Wall Street Journal Prime Rate more than doubled from 3.25% to 7.5%. This meant that buyers’ loan payments increased by more than half for the same amount of borrowed funds in just one year’s time. 2023 was a year of transition for campground and other small business sales. Campground operators had to experience a change in their psychology about interest rates. As a small business banker for the last 45 years, current interest rates do not appear high to me; however, they do appear high to many buyers and sellers who are younger. They think the low interest rates experienced in the last 15 years appear normal. It has taken the last year for the psychology about interest rates to adjust. Buyers are now calculating what the business is worth to them based upon a lower rate of return after paying higher interest on their business loans. Sellers are coming to grips with a new normal too. Many sellers have friends in the industry who sold campgrounds for big profits in 2021 and 2022, and they hoped to do the same. Those really interested in selling are now lowering prices to compensate for buyers’ higher cost of financing. For small business buyers, it is an affordability issue. My advice to buyers and sellers is to review the seller’s last three years’ tax returns. Adjust each year’s Net Income to determine the actual amount of annual cash flow left over, after covering operating expenses and owner’s compensation, to make the proposed annual loan payments. An SBA lender would like to see a minimum Debt Service Coverage Ratio of 1.2X. This means the business has a 20% cushion in its historical cash flow based upon the proposed loan payments. Realize there may be other reasons for a higher sale price besides business income. The property may have some other future development value, but that value is speculative. The speculative value is typically paid for with more owner down payment rather than with small business financing where loan approval is based upon the repayment ability of the business.