With “sub-prime” entering into the national lexicon and devastating many of the world’s financial institutions, it should not be surprising that there has been a direct affect on Small Business Administration (SBA) lenders as well. Many of these lenders joined in the lending exuberance of their mortgage cousins and are now feeling their pain. Some lenders have backed out of SBA loans altogether, and others tightened their requirements to the point where no one who actually needs the money would qualify to borrow it.
Yes, this does make it more difficult for buyers to buy businesses (and sellers to sell), but it is not impossible to get an SBA loan even in today’s market. Often when prospective buyers make an offer on a business, they decide they want to reward their current business banker by getting their SBA loan from them. This may or may not work out well for the buyer depending upon their bank’s expertise in doing SBA loans.
Before expanding on the last statement, let’s step back and have a very brief overview of SBA lending. Any lender can participate in the SBA loan guarantee program (where the US government guarantees up to 85% of a loan’s value to the private lender issuer), but that does not make all lenders equal in the eyes of the government. If they are merely a participating lender, 100% of the authorization remains with government. It also means that they are inexperienced at issuing these loans. The most active and expert SBA lenders qualify to be part of the SBA’s Certified and Preferred Lenders Program. These participants are given partial or full authority to approve loans, which means borrowers get their money faster. Among the criteria for Certified lenders is their heavy involvement in regular SBA loan guarantee processing. They receive a 36-hour turnaround on loan applications. Certified lenders account for 10% of all SBA loan guarantees. Preferred lenders are selected from the SBA’s best lenders and enjoy full delegation of lending authority. They must re-qualify for this status every two years, and the SBA periodically examines their lending profile. Preferred loans account for 18% of all SBA loans.
So if a buyer’s bank is not part of the Certified and Preferred Lender Program, the bank must first internally approve the loan application, and then it is forwarded to the SBA for their authorization. Unless the bank is particularly aggressive in its lending practices, that internal approval could take weeks, if not months, if there are any questions about the application. From our experience, the worst part of working with these inexperienced lenders is what we refer to as the “slow no”: Every indication from the loan representatives is that things are going well, they just need this or that piece of information, which they ask for one at a time over 2-3 months, and then they decline to fund the loan.
In buying or selling a business, time is key. The wrong choice of lender could cost the buyer the company he/she has always dream of owning. All the Preferred Lenders we work with guarantee a 48 hour internal review and preliminary decision. That means in 2 days we know if the loan is going to fly, subject to satisfying the underwriting criteria. If it is a yes, then the paperwork processing begins. If it is a no, then we go to a different lender. Time is not wasted either way.
When searching for an SBA lender, the best place to start is by asking business brokers with whom do they prefer to work. This will let you know who has their proverbial ducks in a row and can get deals closed. If you want to also explore some avenues on your own, the first question you ask should not be, “Do you do SBA loans?” but rather, “Are you an SBA Preferred Lender?”.
The money for small businesses is still out there, it is a matter of finding it. Using the resources at your disposal will make the search much easier.
Thursday, January 17, 2008
Friday, January 11, 2008
How to Choose a Business Broker
Many business owners made their resolution to sell their company this year. If you are one of them, there are some steps you can take in selecting a business broker that will make your goal more likely to come to fruition.
Before we go into the list of questions to ask each prospective broker, first let’s clarify what added value a broker can provide. Business owners typically sell one, maybe two, businesses in a lifetime. All business brokers do is sell businesses. A knowledgeable business broker can make the entire transaction run smoother: finding the buyers, coordinating with the lawyers and accountants (and possibly lenders and escrow companies), handling the negotiations, keeping things on track for a timely close, and advising the owner throughout the entire process. They are there to make the seller’s (and buyer’s) life easier.
If you decide you would like professional representation for the process of selling your business, here are five questions you should definitely ask each broker you interview.
How long have you been a business broker?
While longevity does not necessarily equal quality, industry experience can be quite valuable. If the person you are looking to hire to help you sell your business has not been selling businesses for very long, what are they adding to the process other than a bill for their commission? Do you want to help them through their learning curve?
The reason to ask “How long have you been a business broker?” versus “How long have you been in business?” is an important one: Business brokers fall under real estate licensing requirements. With the slow down in the housing market, it is quite possible that some of those now underemployed individuals will use their exact same license, reorder some business cards, and now package themselves as merger and acquisition specialists. It’s perfectly legal. If you consider selling houses different from selling businesses (and it is!!!!), do you want them to include their previous career as part of their industry experience?
What is my business worth?
If you ever get an on-the-spot answer to this question, run! No one can tell you what your business is worth without analyzing your company financial statements and recasting them. Any reputable business broker will ask to see 3-5 years tax returns, a current profit & loss statement and balance sheet, and will have follow up questions for you.
If you ever get a price quote for calculating the estimated value of your business, run! Some companies out there will charge you anywhere from $5,000 to $80,000 just to tell you a number range of what buyers MIGHT pay for your business. Admittedly, when they are charging that much they do provide the information in a very nice binder, but the money is better spent elsewhere. There are business brokerage firms out there that will do the valuation for free and without obligation. It is worth your effort to find one.
How do you market your clients?
There are some business brokers out there that cold call potential clients saying that they have a buyer in the wings waiting to buy your company. This is impossible. No one is willing to buy a company sight unseen. Giving them the benefit of the doubt, they might have someone who has expressed an industry interest, but typically this line is used to get their foot in the door and get your company as a listing.
It is important that you agree with the marketing strategy that your prospective business broker proposes. Maintaining confidentiality is vital, so all marketing efforts must be done carefully, particularly when dealing with competitors and vendors.
Any marketing strategy should focus on the various buyer categories. Some businesses are better suited to individual acquirer, while others are better suited for another company to purchase. Your potential broker should be able to tell you not only who would be the best match for you company, but also explain to you the “why”.
How much do you charge?
Fee structures vary from firm to firm. In addition to the possibility of a charge for the initial valuation, there are a variety of other charges that might be imposed. Some brokerages charge a monthly fee to actively market the firm; others directly bill the client for all expenses incurred on their behalf plus a commission at the sale.
One thing to keep in mind is that if a broker receives his/her money up front (or on a recurring monthly basis), what is the enticement to sell the business? There are brokers out there that earn only a success fee – a commission paid directly out of escrow when the deal closes, so the broker gets paid only if you get paid. The fee percentage is based on the overall value of the transaction. Since there is no money due if a transaction is not completed, these brokers tie their financial interests to your business selling, which is why you are hiring a business broker in the first place.
Who will be handling the sale of my business?
You’ve met with a business broker who answered all the questions well, you feel comfortable with him/her, and there is great rapport between you. Before you decide to sign the representation agreement, it’s important that you confirm that it is that individual who will be handling your transaction.
Many business brokerage firms send their best people to meet with potential clients. They are very impressive and knowledgeable. Once the contract is signed, however, the account is handed over to a junior associate at the firm, and the initial contact person is not seen again.
Clarifying this point, in writing, can save much heart ache later.
By asking these questions, hopefully you will be able to find a broker that you are comfortable with and who will work in your best interest.
Before we go into the list of questions to ask each prospective broker, first let’s clarify what added value a broker can provide. Business owners typically sell one, maybe two, businesses in a lifetime. All business brokers do is sell businesses. A knowledgeable business broker can make the entire transaction run smoother: finding the buyers, coordinating with the lawyers and accountants (and possibly lenders and escrow companies), handling the negotiations, keeping things on track for a timely close, and advising the owner throughout the entire process. They are there to make the seller’s (and buyer’s) life easier.
If you decide you would like professional representation for the process of selling your business, here are five questions you should definitely ask each broker you interview.
How long have you been a business broker?
While longevity does not necessarily equal quality, industry experience can be quite valuable. If the person you are looking to hire to help you sell your business has not been selling businesses for very long, what are they adding to the process other than a bill for their commission? Do you want to help them through their learning curve?
The reason to ask “How long have you been a business broker?” versus “How long have you been in business?” is an important one: Business brokers fall under real estate licensing requirements. With the slow down in the housing market, it is quite possible that some of those now underemployed individuals will use their exact same license, reorder some business cards, and now package themselves as merger and acquisition specialists. It’s perfectly legal. If you consider selling houses different from selling businesses (and it is!!!!), do you want them to include their previous career as part of their industry experience?
What is my business worth?
If you ever get an on-the-spot answer to this question, run! No one can tell you what your business is worth without analyzing your company financial statements and recasting them. Any reputable business broker will ask to see 3-5 years tax returns, a current profit & loss statement and balance sheet, and will have follow up questions for you.
If you ever get a price quote for calculating the estimated value of your business, run! Some companies out there will charge you anywhere from $5,000 to $80,000 just to tell you a number range of what buyers MIGHT pay for your business. Admittedly, when they are charging that much they do provide the information in a very nice binder, but the money is better spent elsewhere. There are business brokerage firms out there that will do the valuation for free and without obligation. It is worth your effort to find one.
How do you market your clients?
There are some business brokers out there that cold call potential clients saying that they have a buyer in the wings waiting to buy your company. This is impossible. No one is willing to buy a company sight unseen. Giving them the benefit of the doubt, they might have someone who has expressed an industry interest, but typically this line is used to get their foot in the door and get your company as a listing.
It is important that you agree with the marketing strategy that your prospective business broker proposes. Maintaining confidentiality is vital, so all marketing efforts must be done carefully, particularly when dealing with competitors and vendors.
Any marketing strategy should focus on the various buyer categories. Some businesses are better suited to individual acquirer, while others are better suited for another company to purchase. Your potential broker should be able to tell you not only who would be the best match for you company, but also explain to you the “why”.
How much do you charge?
Fee structures vary from firm to firm. In addition to the possibility of a charge for the initial valuation, there are a variety of other charges that might be imposed. Some brokerages charge a monthly fee to actively market the firm; others directly bill the client for all expenses incurred on their behalf plus a commission at the sale.
One thing to keep in mind is that if a broker receives his/her money up front (or on a recurring monthly basis), what is the enticement to sell the business? There are brokers out there that earn only a success fee – a commission paid directly out of escrow when the deal closes, so the broker gets paid only if you get paid. The fee percentage is based on the overall value of the transaction. Since there is no money due if a transaction is not completed, these brokers tie their financial interests to your business selling, which is why you are hiring a business broker in the first place.
Who will be handling the sale of my business?
You’ve met with a business broker who answered all the questions well, you feel comfortable with him/her, and there is great rapport between you. Before you decide to sign the representation agreement, it’s important that you confirm that it is that individual who will be handling your transaction.
Many business brokerage firms send their best people to meet with potential clients. They are very impressive and knowledgeable. Once the contract is signed, however, the account is handed over to a junior associate at the firm, and the initial contact person is not seen again.
Clarifying this point, in writing, can save much heart ache later.
By asking these questions, hopefully you will be able to find a broker that you are comfortable with and who will work in your best interest.
Thursday, January 3, 2008
5 Things Buyers of Privately Owned Businesses Want
Whenever we ask our clients what they think the potential acquirers of their businesses are looking for, they inevitably first respond with, “a low price.” Pricing is an important component, but there is a lot more to it. Here are the top 5 things buyers look for in a business acquisition:
1. A Fair Price
Most buyers are willing to pay what is fair for a business (and not any more). Yes, if they could get the same company at half the price, they’d take it, but there would be major red flags about what is wrong with it if it were to sell too cheaply. The catch is that what a buyer and seller view as a fair price is not always the same thing. Business owners often have their own perception of value, which may or may not be based on the same data acquirers use to calculate what they would be willing to pay.
An experienced business broker will be able to use a company’s financial information and their own industry knowledge to develop a realistic valuation range of the probable sales price. Having that information before going to market will allow the seller to have more realistic price expectations.
2. A Good Fit
Obviously finding an appropriate acquirer is important. There are 2 main categories of buyers: individuals and companies. Individuals more often than not buy companies that fall within their area of expertise. Occasionally we encounter those wanting to try something completely new, but they are the exceptions to the rule. Finding individuals whose experience is a good match is difficult (as all of you who have tried to hire managers know). Now add in the important complications of finding someone with that experience, who has the personal fortitude to want to step out on his/her own, AND who also has enough financial wherewithal to afford to purchase your company, and you see where the art of a targeted marketing effort pays off.
When companies use acquisition to expand, they are typically looking to increase their geographic area (same industry acquirers) or to provide more depth of service to their current customers (synergistic acquirers). Accessing the key decision makers in organizations in both these realms is a vital part of marketing any organization. What is absolutely vital when approaching competitors or suppliers is to maintain confidentiality. If word gets out that your company is for sale, it can devastate sales as your clients start to take their business elsewhere, and vendors become reluctant to issue credit. Also, do you really want to give your competition a peak at all your company’s internal documents? For all these reasons, it is essential to handle these negotiations carefully.
3. Reliable Records
While having an in-depth, well-written overview of the company will pique buyer’s interest, it is vital that the company’s documentation support what was presented. An honest disclosure of the business is the best protection against future litigation. It also can foster a sense of trust from the buyer since it is not a “rose colored glasses” view of the company. Presenting both the good and the bad allows the buyer to make an educated decision about your organization, which can reduce the amount of perceived risk that he or she would be taking on.
4. Serious Seller
The last thing the buyer wants to do is expend a great deal of time, energy and money doing a complete due diligence of a company to have the owner back out at the last minute. One way to demonstrate to a buyer the seriousness of one’s intention to sell is to have a well developed plan for life after the business is sold. Whether it is moving to a different part of the country, retiring, or traveling the world, the “what” doesn’t really matter. “I don’t know what I’ll do” can be a kiss of death to a transaction because it shows the seller hasn’t thoroughly thought things through … and therefore might not follow through with the transaction.
5. A Vision for the Future
People who buy companies for the most part are not looking to maintain the status quo – the entrepreneurial spirit that drives them to work for themselves also motivates them to move things forward. For that very reason, it is up to the sellers to demonstrate that there is potential for growth within the company, even for businesses that are doing really well. One of the exercises we do with our clients is to have them imagine that they are 20 years younger and have unlimited capital: What would they do to expand the business?
While having ideas for the future is important, it is equally as important to realize that potential buyers might have radically different plans for the business. Once the contracts are all signed and final handshakes made, the company is theirs to do with as they please. This letting go can be difficult for some owners, even if they are completely burned out. Accepting that someone else can run your “baby” is part of the sales process.
Understanding what buyers are looking for is an important first step in marketing your business for sale. Some people are able to navigate the waters on their own and sell their businesses themselves. Others look to professionals to help them. Check in next week to see what questions you should ask when hiring a business brokerage firm.
1. A Fair Price
Most buyers are willing to pay what is fair for a business (and not any more). Yes, if they could get the same company at half the price, they’d take it, but there would be major red flags about what is wrong with it if it were to sell too cheaply. The catch is that what a buyer and seller view as a fair price is not always the same thing. Business owners often have their own perception of value, which may or may not be based on the same data acquirers use to calculate what they would be willing to pay.
An experienced business broker will be able to use a company’s financial information and their own industry knowledge to develop a realistic valuation range of the probable sales price. Having that information before going to market will allow the seller to have more realistic price expectations.
2. A Good Fit
Obviously finding an appropriate acquirer is important. There are 2 main categories of buyers: individuals and companies. Individuals more often than not buy companies that fall within their area of expertise. Occasionally we encounter those wanting to try something completely new, but they are the exceptions to the rule. Finding individuals whose experience is a good match is difficult (as all of you who have tried to hire managers know). Now add in the important complications of finding someone with that experience, who has the personal fortitude to want to step out on his/her own, AND who also has enough financial wherewithal to afford to purchase your company, and you see where the art of a targeted marketing effort pays off.
When companies use acquisition to expand, they are typically looking to increase their geographic area (same industry acquirers) or to provide more depth of service to their current customers (synergistic acquirers). Accessing the key decision makers in organizations in both these realms is a vital part of marketing any organization. What is absolutely vital when approaching competitors or suppliers is to maintain confidentiality. If word gets out that your company is for sale, it can devastate sales as your clients start to take their business elsewhere, and vendors become reluctant to issue credit. Also, do you really want to give your competition a peak at all your company’s internal documents? For all these reasons, it is essential to handle these negotiations carefully.
3. Reliable Records
While having an in-depth, well-written overview of the company will pique buyer’s interest, it is vital that the company’s documentation support what was presented. An honest disclosure of the business is the best protection against future litigation. It also can foster a sense of trust from the buyer since it is not a “rose colored glasses” view of the company. Presenting both the good and the bad allows the buyer to make an educated decision about your organization, which can reduce the amount of perceived risk that he or she would be taking on.
4. Serious Seller
The last thing the buyer wants to do is expend a great deal of time, energy and money doing a complete due diligence of a company to have the owner back out at the last minute. One way to demonstrate to a buyer the seriousness of one’s intention to sell is to have a well developed plan for life after the business is sold. Whether it is moving to a different part of the country, retiring, or traveling the world, the “what” doesn’t really matter. “I don’t know what I’ll do” can be a kiss of death to a transaction because it shows the seller hasn’t thoroughly thought things through … and therefore might not follow through with the transaction.
5. A Vision for the Future
People who buy companies for the most part are not looking to maintain the status quo – the entrepreneurial spirit that drives them to work for themselves also motivates them to move things forward. For that very reason, it is up to the sellers to demonstrate that there is potential for growth within the company, even for businesses that are doing really well. One of the exercises we do with our clients is to have them imagine that they are 20 years younger and have unlimited capital: What would they do to expand the business?
While having ideas for the future is important, it is equally as important to realize that potential buyers might have radically different plans for the business. Once the contracts are all signed and final handshakes made, the company is theirs to do with as they please. This letting go can be difficult for some owners, even if they are completely burned out. Accepting that someone else can run your “baby” is part of the sales process.
Understanding what buyers are looking for is an important first step in marketing your business for sale. Some people are able to navigate the waters on their own and sell their businesses themselves. Others look to professionals to help them. Check in next week to see what questions you should ask when hiring a business brokerage firm.
Thursday, December 27, 2007
New Year’s Resolutions for Business Owners
The New Year is when we often take the time to plan for the year ahead. If you are thinking of transitioning your business sometime in the next 1-5 years, the New Year is also a great time to start making some changes that could result in your company selling at a higher price. While there are no guarantees, the following three resolutions have shown themselves to have positive results with our past clients:
Put Your Energy Into the Business
Many people as they are considering retirement have a tendency to start a little early and let the business coast. One thing about coasting – it is always downhill. Putting in the effort your company needs to grow should produce higher revenues which in turn can lead to a higher sales price. If you know your purchasing can use a little tweaking to reduce the COGS percentage, do it now. The more profitable your company, the more valuable it will appear to potential acquirers.
There is one caveat: Do not make long-term commitments at this stage. The new owner might have a different vision for the company and needs the freedom to grow the business to fit their goals.
Run Everything Through the Books
Of course we are all IRS Tax Law abiding citizens, but occasionally a cash job might accidentally slip one’s mind when it comes time to complete the company’s tax return. It is vital in the run up to a sale that all revenue is categorized accurately. The improvement in profitability will be reflected in the sales price. SBA lenders and Buyers work exclusively off of tax returns. Any reputable business broker will therefore use only those figures in marketing your business. An added benefit is that this is an easy way to help increase your revenues and lower your COGS percentage.
Train Someone Else to Do at Least Part of Your Job
One of the hardest parts of selling a business is for the owner to truly accept that someone else can run their company. A way to help ease that transition is to start building your staff to take on more responsibility. This is a case of training them well and managing your people. This might seem it contradicts Resolution #1, but it doesn’t. It doesn’t mean spending less time in the business, rather it is putting the owner in a more administrative and less hands-on position.
The businesses that are the most difficult to sell are where the buyers perceive the seller to be “superman” or “superwoman”. Think of it this way: If you do everything from concept design to pricing to supervising employees, are working 80+ hours a week, and personally cultivate all the vendor and client relationships, what buyer could replace you? The new owner will probably not have your exact same skill set. If you can reduce your direct area of responsibility to one or two, the odds of a successful transition increase dramatically.
Adopting some (or all) of these resolutions could potentially increase the value of your business when it is time to sell.
Have a safe, happy, and profitable New Year.
Thursday, December 20, 2007
When is the right time to sell my business?
It is amazing how often we hear this question. What is also amazing is that there is more than one meaning behind it. Owners typically mean one of two things when they ask that question:
What is the best time of year for selling a business?
For a company whose revenues come in pretty consistently throughout the year, timing is not that important. There is the dead zone that seems to occur between Thanksgiving and the New Year, but other than that, timing based on a calendar is immaterial.
If the company is seasonal in nature, however, the timing for coming to market is much more important. Who wants to buy a company that has already realized the majority of its profits for the year, particularly if that event occurs mid-summer? For seasonal companies, it is best to have the transaction completed at least a month before the busy period to allow for a smooth transition to occur before the desired selling frenzy begins. Keep in mind that selling a business does not happen overnight: on average it takes 4-6 months from the time the marketing process begins until a deal closes. That means if the summer or fall is your busy season, it is best to start the process at the beginning of the year.
In terms of my company’s growth, when is the best time to sell?
As you would have a guessed, a company with consistently growing revenues and an expanding bottom line will sell for a higher premium than one in decline. People like to buy companies that are doing well. If a company is doing well, and has a track record of 3-5 years of doing well, it is a great time to sell. Does that mean if a company hasn’t fared as well that it shouldn’t go on the market? Not at all, but the understanding has to be that the amount the owner will receive will be reduced based on the acquirers perceived risk involved in the transaction.
If a company has not had an ideal track record but can show growth over the last year and current financials demonstrate that the trend is continuing, it helps to allay the fears in the minds of potential buyers. Because of this fact we often recommend to sellers to hold on for one more year or so to improve the financial situation of the company. Many times the owners have let the business coast while they were dreaming of retirement. Only by building the steam back up can the full earning potential of the company be realized.
There are times when personal situations mean that waiting is simply not possible. Most businesses can be sold, but keep in mind, distressed businesses produce distressed sales prices. Depending upon the severity of the decline, it might mean a fire sale (selling off all the assets to the highest bidder and closing the doors). Often in those cases, being out from under the company responsibility has its own intrinsic rewards.
If you want to know if now is a good time to sell your business, give us a call. We can give you a free valuation range of your company’s current worth. If that fits in with what you need to move on with your life, it is a great time to sell. If it doesn’t, perhaps we can offer some suggestions on getting that number into your desired range.
What is the best time of year for selling a business?
For a company whose revenues come in pretty consistently throughout the year, timing is not that important. There is the dead zone that seems to occur between Thanksgiving and the New Year, but other than that, timing based on a calendar is immaterial.
If the company is seasonal in nature, however, the timing for coming to market is much more important. Who wants to buy a company that has already realized the majority of its profits for the year, particularly if that event occurs mid-summer? For seasonal companies, it is best to have the transaction completed at least a month before the busy period to allow for a smooth transition to occur before the desired selling frenzy begins. Keep in mind that selling a business does not happen overnight: on average it takes 4-6 months from the time the marketing process begins until a deal closes. That means if the summer or fall is your busy season, it is best to start the process at the beginning of the year.
In terms of my company’s growth, when is the best time to sell?
As you would have a guessed, a company with consistently growing revenues and an expanding bottom line will sell for a higher premium than one in decline. People like to buy companies that are doing well. If a company is doing well, and has a track record of 3-5 years of doing well, it is a great time to sell. Does that mean if a company hasn’t fared as well that it shouldn’t go on the market? Not at all, but the understanding has to be that the amount the owner will receive will be reduced based on the acquirers perceived risk involved in the transaction.
If a company has not had an ideal track record but can show growth over the last year and current financials demonstrate that the trend is continuing, it helps to allay the fears in the minds of potential buyers. Because of this fact we often recommend to sellers to hold on for one more year or so to improve the financial situation of the company. Many times the owners have let the business coast while they were dreaming of retirement. Only by building the steam back up can the full earning potential of the company be realized.
There are times when personal situations mean that waiting is simply not possible. Most businesses can be sold, but keep in mind, distressed businesses produce distressed sales prices. Depending upon the severity of the decline, it might mean a fire sale (selling off all the assets to the highest bidder and closing the doors). Often in those cases, being out from under the company responsibility has its own intrinsic rewards.
If you want to know if now is a good time to sell your business, give us a call. We can give you a free valuation range of your company’s current worth. If that fits in with what you need to move on with your life, it is a great time to sell. If it doesn’t, perhaps we can offer some suggestions on getting that number into your desired range.
Friday, September 28, 2007
SBA Loans - An Overview
The SBA is many things to many people, and the one that is most user friendly and available to both existing and prospective business owners is the 7a program. The 7a program is the program that is available to qualifying individuals who wish to purchase a privately owned business or to an existing business owner who wishes to buy out an existing partner or expand operations, etc.
It should also be noted that while people talk about ‘SBA financing’ the reality is that the SBA does not make loans; however, the SBA under certain circumstances will guarantee 75% of the amount that lenders loan on SBA approved loans. This means that if an approved SBA guaranteed loan becomes a total 100% loss then the SBA will reimburse the lender 75% of the original loan amount. Why does the SBA make loans? It is one of the government’s efforts to {a} stimulate the economy, {b} provide some financial liquidity where none would otherwise exist, and {c} other reasons best known to those who dole out government sponsorship and/or funds. The SBA charges points – which vary with loan size but generally in the 2% to 3% range – on all loans that they guarantee, and those funds are intended to cover both SBA operating expenses and provide loss reserves for bad loans.
Many years ago a prospective borrower had to interface directly with the SBA, and it was a time-consuming, bureaucratic nightmare of complicated government forms, busy and harried SBA clerks and a real zoo to maintain any sanity or timelines during the process. The procedures have since been streamlined with the SBA designating ‘preferred lenders’ {most banks} who do all of the application, screening and processing work and make the actual loans. This has dramatically improved the process; however, not all preferred lenders are as efficient and expedient as others - some specialize and have good departments that know what they are doing, and others seem to have difficulty in functioning in an efficient manner. You will find that virtually all banks proudly proclaim their preferred status.
As you are most probably aware, virtually all lenders are asset based lenders in the sense that they approve or disapprove of loans based upon the estimated liquidation value of the assets (collateral) that can be pledged to secure the loan. ‘Assets’ can range from equity in real estate to ownership of stocks and bonds, equipment, accounts receivable, etc. You will also find that some businesses that you might be interested in buying have lots of assets and others have very few assets. While either category does not make one or the other a good or a bad business, it clearly impacts how a lender will view a prospective loan. Thus, if you want to buy a business with lots of hard assets {machinery, rolling stock, inventory), then the lender will probably be less concerned with having you pledge other additional assets. If the business has few assets {perhaps a service business}, the lender will be highly motivated to have you pledge other assets.
The SBA 7a program is unique in that it is not asset based, but they lend based upon a proven and established cash flow within a business. In other words, if a business has had ‘x’ level of profitability for a number of years, an applicant and the business can basically pledge that future cash flow to get an SBA guaranteed loan. While that seems simple enough, the applicant must be able to {a} demonstrate an ability to operate the business, {b}make a suitable cash down payment, {c} be paying a reasonable price so that ‘cash flows’, and {d} also have a reasonably clean personal and/or business credit rating.
So while an SBA guaranteed loan might be a cash flow loan, the SBA requirements are such that if the borrower has other additional collateral, the lender is obligated to place liens as additional security on those other assets.
The maximum guarantee under a 7a loan is 75% of a $2,000,000 loan, and thus it is extremely rare to see 7a loans in excess of two million. With the purchase of businesses, the typical down payment is 20%; however, it can be as low as 10% under certain types of circumstances. Interest rates are variable and generally range from a low {with strong outside collateral} of about 1.5% over prime to somewhere around 2% to 2.5% over prime on most 7a loans.
Amortization periods can vary from 7 to 10 years and do not have prepayment penalties. The loans are almost always in first position on all of the assets being acquired {i.e. existing debt typically has to be paid off},and liens of outside collateral can either be in a first/second/third position, subject to the nature of the asset and the equity involved.
The amount of time to get an SBA loan approved and then the timelines necessary for funding vary tremendously from lender to lender, regardless of what they say at the outset. In our involvement with referring buyers to SBA financing, we have just two lenders who we believe are worth the time of day, and both give us very rapid turn around times and can close transactions in less than 30 days. Over the years we have tried many other lenders and have always regretted straying from the two tried and true lenders with whom we have worked for years.
In summary, SBA guaranteed loans are ‘the only game in town’ if you are looking to buy a privately owned business. They are the ‘cash flow’ loans, as opposed to typical banks loans that require that your pledged collateral be equal to or exceed the amount of money that is borrowed.
It should also be noted that while people talk about ‘SBA financing’ the reality is that the SBA does not make loans; however, the SBA under certain circumstances will guarantee 75% of the amount that lenders loan on SBA approved loans. This means that if an approved SBA guaranteed loan becomes a total 100% loss then the SBA will reimburse the lender 75% of the original loan amount. Why does the SBA make loans? It is one of the government’s efforts to {a} stimulate the economy, {b} provide some financial liquidity where none would otherwise exist, and {c} other reasons best known to those who dole out government sponsorship and/or funds. The SBA charges points – which vary with loan size but generally in the 2% to 3% range – on all loans that they guarantee, and those funds are intended to cover both SBA operating expenses and provide loss reserves for bad loans.
Many years ago a prospective borrower had to interface directly with the SBA, and it was a time-consuming, bureaucratic nightmare of complicated government forms, busy and harried SBA clerks and a real zoo to maintain any sanity or timelines during the process. The procedures have since been streamlined with the SBA designating ‘preferred lenders’ {most banks} who do all of the application, screening and processing work and make the actual loans. This has dramatically improved the process; however, not all preferred lenders are as efficient and expedient as others - some specialize and have good departments that know what they are doing, and others seem to have difficulty in functioning in an efficient manner. You will find that virtually all banks proudly proclaim their preferred status.
As you are most probably aware, virtually all lenders are asset based lenders in the sense that they approve or disapprove of loans based upon the estimated liquidation value of the assets (collateral) that can be pledged to secure the loan. ‘Assets’ can range from equity in real estate to ownership of stocks and bonds, equipment, accounts receivable, etc. You will also find that some businesses that you might be interested in buying have lots of assets and others have very few assets. While either category does not make one or the other a good or a bad business, it clearly impacts how a lender will view a prospective loan. Thus, if you want to buy a business with lots of hard assets {machinery, rolling stock, inventory), then the lender will probably be less concerned with having you pledge other additional assets. If the business has few assets {perhaps a service business}, the lender will be highly motivated to have you pledge other assets.
The SBA 7a program is unique in that it is not asset based, but they lend based upon a proven and established cash flow within a business. In other words, if a business has had ‘x’ level of profitability for a number of years, an applicant and the business can basically pledge that future cash flow to get an SBA guaranteed loan. While that seems simple enough, the applicant must be able to {a} demonstrate an ability to operate the business, {b}make a suitable cash down payment, {c} be paying a reasonable price so that ‘cash flows’, and {d} also have a reasonably clean personal and/or business credit rating.
So while an SBA guaranteed loan might be a cash flow loan, the SBA requirements are such that if the borrower has other additional collateral, the lender is obligated to place liens as additional security on those other assets.
The maximum guarantee under a 7a loan is 75% of a $2,000,000 loan, and thus it is extremely rare to see 7a loans in excess of two million. With the purchase of businesses, the typical down payment is 20%; however, it can be as low as 10% under certain types of circumstances. Interest rates are variable and generally range from a low {with strong outside collateral} of about 1.5% over prime to somewhere around 2% to 2.5% over prime on most 7a loans.
Amortization periods can vary from 7 to 10 years and do not have prepayment penalties. The loans are almost always in first position on all of the assets being acquired {i.e. existing debt typically has to be paid off},and liens of outside collateral can either be in a first/second/third position, subject to the nature of the asset and the equity involved.
The amount of time to get an SBA loan approved and then the timelines necessary for funding vary tremendously from lender to lender, regardless of what they say at the outset. In our involvement with referring buyers to SBA financing, we have just two lenders who we believe are worth the time of day, and both give us very rapid turn around times and can close transactions in less than 30 days. Over the years we have tried many other lenders and have always regretted straying from the two tried and true lenders with whom we have worked for years.
In summary, SBA guaranteed loans are ‘the only game in town’ if you are looking to buy a privately owned business. They are the ‘cash flow’ loans, as opposed to typical banks loans that require that your pledged collateral be equal to or exceed the amount of money that is borrowed.
Friday, September 21, 2007
10 Worst Mistakes When Selling Your Business
Thinking about selling your business? You are not alone. CNN Money reports that 35 million baby boomers are expected to retire between 2000 and 2020.
If you are approaching retirement or soon will be, chances are you've considered putting your business on the market for one of the following reasons:
- You feel burned out;
- Industry conditions have changed;
- You are facing health issues;
- Your business has matured and plateaued;
- Your business is doing well;
- It's a good market for the sale of a business.
In the end, no matter what your scenario or reason for selling, your objective is to get the most money for your blood, sweat, and tears. Here are ten mistakes not to make when selling your privately owned small business:
- Not knowing your business' true market value. Different buyers will have different perceptions of value and some will pay far more than others. Unless you know your business' range of value, you are handicapped in the process. Knowing value is always the best starting point when you plan to sell your business.
- Having customers, employees and others know you are planning to sell. Keeping the entire process confidential is essential, otherwise you create the risk of losing employees, customers, and vendors. This will negatively impact both value and marketability.
- Stating an asking price. Putting a price on a business creates a ceiling. If you are able to find that "value added" buyer who will pay a premium for your business, a stated price may result in a lot of money left on the table.
- Provide Seller Financing. There are a number of lenders who will finance buyers wishing to purchase privately owned businesses. Your objective should be to get cashed out. If you do provide any financing, it should be a small percentage of the sales price.
- Allowing the buyer to control the process. If you allow interested buyers to dictate the "what' and "when", you will find that you end up going through lots of processes (such as due diligence) numberous times rather than only once, which should be done solely with your prevailing buyer.
- Not having mulitple buyers involved in the process. There is an old saying in the mergers and acquisitions industry: One buyer is no buyer. This simply means that with three or four buyers competing for your business, you are more likely to end up with the best possible transaction regarding price, tax structuring, getting cashed out, and having a low litigation risk profile.
- Not understanding essential tax issues. After-tax dollars in the sale of a corporation can vary between 45% and 85% of the sales price based solely upon tax structuring issues. This means that you need to understand the ramifications before you start the process.
- Neglecting your business while trying to sell it. Psychologically, once you decide to sell your business there is an inclination to slow down or spend time on the selling process to the detriment of the business. If you do this, earnings will suffer, and it will lower your business' value, negatively influencing marketability.
- Handling the process without professional help. If you are struggling with the decision to hire a professional to help sell your business, consider these gruesome war stories about people who have traveled this path alone and ended up:
· Paying more in taxes than they might otherwise have had to;
· Sold far below their true range of value;
· Financed the buyers and ended up not getting paid;
· Spent time and money during the process and still did not get their business sold;
· Ended up with poor legal documents resulting in litigation issues.
Typically, the sale of a privately owned business involves a large percentage of the seller’s net worth. Don’t begin your learning curve at ground zero.
10. Paying front end fees to merger and acquisition firms or brokers. If you elect to get professional assistance, you are advised not to pay brokers and others front end fees other than the necessary fees to close the transaction. Many firms in recent years have collected substantial sums of money from clients without ever selling their business.
Ultimately, how you sell your business is just as important as how you run it. Do your research and carefully consider engaging the services of an experienced, proven professional with a stellar reputation.
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