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.

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:

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.
8. 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.
9. 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.

Handling Unsolicited Offers for Your Business

Things You Need to Know About Unsolicited Offer to Buy Your Privately Owned Business



While it represents a compliment to you that someone wants to buy your business, you need to proceed with a wary eye and a questioning mind. I say this based upon a lot of years in the business of representing people in the sale of their privately owned businesses and for the following specific reasons:

* It is very rare for the owner of a privately owned business to have a realistic idea as to the true range of value of their business. Thus, an offer out of the blue almost by definition means that the owner is not able to intelligently deal with the situation unless they take the right steps to first understand the true value of their business and then to carefully and intelligently move forward from there.

* Most one buyer transactions are driven by the buyer ‘wanting to see this, that and the other’ key documents and information about a business. If everything that is asked for is given without thought, judgment and some filtering, the seller can end up in a very difficult and high risk situation of having inadvertently disclosed highly confidential information and even more importantly, disclosed information that does not portray their business in the best light.

* Virtually all unsolicited offers involve the buyer wanting the seller to finance some or a large part of the proposed transaction. However, the reality of the matter is that the seller’s best interests are to either get 100% cashed out or to get very close to 100% cashed out. If you wish to sell, doesn’t it make a great deal of sense to have some financing commitments already in place?

* One of the most fundamental issues to understand in the sale of a privately owned business is that virtually no privately owned businesses are operated in a manner to maximize the taxes that they, or their stockholders, pay. This being the case, all financial information, prior to being given to a potentially interested buyer, needs to be ‘recast’ by someone who is highly experienced and knows what they are doing, otherwise you simply put yourself ‘behind the 8 ball’, or worse, reduce to writing the fact that you have ‘fudged’ on paying taxes.

* If you accept the basic fact that your business has a ‘range of value’ {as opposed to just a single number representing value} and that the difference between the high and low values can be as much as 50%, or more --- then what are the chances of the unsolicited offer ‘magically’ being at the upper end of your ‘range of value’?

* If you understand the simple fact that most tax decisions related to the sale of businesses are ‘win-lose’ {one party pays less in taxes and the party pays more in taxes) do you really believe that your unsolicited buyer is going to voluntarily give you half, or more, of the tax benefits? Do you realize that ‘tax structuring’ can cut in half or double your net after tax dollars?

* Put yourself in the buyer’s position --- are you going to get the best deal if you are the only interested buyer, or if there is competition among multiple buyers? You don’t have to be a rocket scientist to know that intelligent packaging and marketing can generate multiple buyers, multiple offers and the high probability of greater numbers of ‘net after tax dollars’.


While the above bullet points cover a wide swath of advice and many years of experience, the best thing to do when presented with an unsolicited offer is to:

(1) Decide whether or not you wish to sell, regardless of price --- i.e. life style issues should be the order of the day;

(2) If the lifestyle decision is ‘yes’ --- then get some professional help in determining if timing is in your favor or against you, and then make a timing decision as to when to go to market;

(3) When it is time to go to market, get some professional guidance to value, package, market and represent your business --- from many years of experience I can assure you that the ‘extra dollars’ that their efforts will generate will be many fold what you have to pay them;

(4) When retaining that professional assistance DO NOT pay them any fees prior to them getting your business sold and also make certain that the representation agreement gives you the right to terminate future representation (in the event they end up not doing a good job); and

(5) Once you have other interested buyers, sit down with the ‘unsolicited buyer’ and you will then be able to do so with a ‘level playing field’.

Selling A Franchised Business

What is Involved in Selling a Franchised Business?


The best answer is, ‘It depends!’ By that I mean it depends upon what your franchise agreement and any amendments state with respect to your rights and obligations relative to a potential transfer of ownership. Some of the things that you are likely to find are:

First Right of Refusal: In many cases the franchisor has a ‘first right of refusal’ to buy your franchise upon whatever terms and conditions you have negotiated with an independent party. The existence of such a clause means that few buyers will be interested in pursuing your business, as they run the risk of doing all the investigation and review and then being left on out of the picture. Anyway, you need to know whether or not the franchisor has such a right and, if they do, whether or not they intent to exercise it.

Right of Approval: Most franchisors have the right to approve a successor franchisee with respect to their financial, business and other qualifications, etc. These ‘rights to approve’ typically have teeth in them to the extent that the agreements state that any unauthorized transfers of ownership terminate the franchise agreement. In many cases, the approval is also accompanied by additional conditions, such as obligation to enlarge, upgrade, open an additional location, etc.

Transfer Fee: Most franchise agreements require an ‘approved successor owner’ to pay a transfer fee to the franchisor. In most cases, it is not a large amount and is generally considerably less than the fee paid by the original franchisee.

Training or Other Requirements: The backbone of most franchises is ‘standardized methods of operation’, and therefore many franchisors require that new inexperienced operators agree to attend and complete franchisor sponsored training before they are permitted to assume ownership.

Term of the Franchise Agreement: Few franchise agreements are in place forever, and therefore most have expiration dates, some have options for renewal, etc. --- and therefore it is very important to have either a relatively long term left on your franchise agreement when you go to sell or already have renewal options negotiated and in place.


The foregoing are the primary issues that you will have to understand and possibly have to deal with in the sale of your franchised business. You should also find out if your franchisor actively resells franchise locations and what their track record is in so doing. Some franchisors have good programs in that they are typically always advertising for brand new franchisees and thus have prospects for existing franchises; however, the reality is that most franchisors are far more interested in the sale of a new location (with large front end and real estate related fees and profit potentials) than they are in the resale of an existing location.

Hopefully the foregoing gives you a good head start in understanding the process that you are about to undertake.