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.
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