The SBA 7(A) program helps small entrepreneurs start or expand their businesses with loans through bank and non-bank lending institutions. Previously the loans only allowed a maximum of $250,000 in intangibles (including goodwill) to be financed. However, under the revised rules, it is now possible to finance any amount of goodwill (even up to this program’s lending limit of $2,000,000), as long as at least 25 percent equity exists in borrower down payment and/or seller stand-by financing.

There is more good news, in that the SBA has temporarily increased its guarantee from 75 percent to 90 percent of the total loan amount, and currently waives the guarantee fee (2.6 percent of the loan amount) charged to borrowers.
For buyers and sellers of a business that want to use an SBA 7(A) loan, it is important to keep in mind that each bank will likely have their own criteria and means it is necessary to contact your bank to determine its specific approach. Some good talking points to help you though include:

1. Cash flow. Remember, SBA loans are cash flow loans, that is, the business must be generating a positive cash flow. Each bank will assess the company’s loan repayment ability using the Debt Service Coverage Ratio (cash available for debt service divided by cash required for debt service). Banks will usually deny a loan if revenues have declined in recent years, although they may make an exception if the company can demonstrate a current stabilization or growth trend.
2. Buyer downpayment. In general terms, a lender will want to see the buyer provide about 20 percent down payment to buy the business. A buyer could then finance the remaining 80% with a combination of the seller carrying a note of say 15% and bank finance of 65%. The buyer downpayment could come from sources such as family gifts, a tax-free rollover of a 401(k) or IRA, or home equity line of credit (as long as the buyer has an additional, unrelated income stream large enough to feasibly pay off the debt). A bank may also accept a seller’s note on full standby, which means the seller agrees to forgo any payments until the senior bank debt gets paid in full.
3. Buyer management expertise. The lender will expect a potential buyer to have extensive and relevant ownership or management experience. In 2007 the SBA did some research to see why businesses were failing with an SBA loan and they found one of the main reasons was a lack of management experience in the industry the business was operating. The lender may waive this in the case of an established franchise, as long as the company is not in the hotel/motel, restaurant, or construction industry.
4. Collateral. The requirement for collateral varies with a bank as does any specific minimum coverage. However, where it is available helps the buyer’s loan application position. Most lenders also favor deals where real estate is available.
5. Buyer credit and legal history. A FICO score of at least 650 is typically required and often higher, that is, 680. A buyer also needs to have a relatively clear legal history.
6. Loan amounts. Although the SBA currently limits loan amounts to $2,000,000 for non-real estate transactions (and up to $5,000,000 for 100 percent real estate deals), it is possible to combine SBA financing with other payment options to accommodate proposals with larger financing requirements. For instance, you can use current asset-based lending or seller financing for this purpose.

 The temporary provisions may only extend through the end of 2010, but Congress is expected to raise the overall guarantee limit to $5,000,000 (with up to a 90 percent guarantee.) In addition, the SBA 504 program limits for 100 percent real estate transactions may increase to $14,000,000.

First, it’s rarely as simple as closing the door and handing the key back to the landlord. If your business has a lease you obviously need to discuss the situation with the landlord. If you have a good relationship and feel you can handle it on your own to save hiring help, take care as you handle the issue. Bear in mind the landlord is no different to you. They lease the real estate to make money. If you close the doors, they need to find a replacement for you which may take time to achieve. This can be a talking point with the landlord as you may be able to bring a tenant to replace you. If this is the case, make sure this is correct as the landlord may become frustrated if the person changes their mind. Similarly, the landlord is not required to accept the person you bring so be aware the landlord has options.

Second, and this is the main reason for this article, some businesses are cash poor and so are struggling to keep their doors open. That is, they are unable to generate enough sales to produce the profit that allows them to keep their doors open. However, some of these businesses are rich in assets. If this is the case, a real option is to manage down the assets to either keep the business going or get the best price possible for the assets. Here are some suggested strategies.

If the business has a lot of excess inventory but limited cash, move the excess inventory. This means going through each piece of inventory to make sure it’s in good condition. If its condition is questionable, discount it but get it sold. Better to have a few dollars in the business and free up some space than have it sit around and collect dust. This is especially true if the business is paying to store any inventory as costs can be reduced by eliminating unnecessary storage space.

Most buyers are interested in two things when buying a business; cash flow to service debt and provide an income to sustain the buyer’s lifestyle and potential. Buyers are not excited about buying a business and managing it down to a smaller business. If you own a business that is challenged by cash flow and limited potential, your buyer may be someone in the industry who is looking to add the assets of your business to their business and therefore take you out as a competitor. These buyers can be harder to find and they are almost always only motivated by paying as low a price as possible.

The Senate and the House have both passed various versions of the following improvements to the Small Business Admin 7a and 504 loan programs. This is a very good thing for Small Business, Entrepreneurs, Banks and Business Brokers and Developers. There is something for everyone in this Senate Bill outlines below. It still needs to be signed into law and the SBA needs to make their official guidelines public, but this should be what is coming.

Senate Bill 2869 contains several critical provisions to bolster SBA assistance to America’s nearly 30 million small businesses and aspiring entrepreneurs. Specifically, the bill would:
• Increase the loan limit on 7(a) loans from $2 million to $5 million;
• Increase the loan limit on 504 loans from $1.5 million to $5.5 million;
• Increase the loan limit on microloans from $35,000 to $50,000 and increase the maximum loan made to a microloan intermediary from $3.5 million to $5 million;
• Allow the 504 loan program to refinance short-term commercial real estate debt into, long-term, fixed rate loans;
• Extend the authorization to provide 90 percent guarantees on 7(a) loans and fee elimination for borrowers on 7(a) and 504 loans through December 31, 2010; and
• Direct the SBA to create a website where small businesses can identify lenders in their communities.

On October 21, 2009, President Obama announced steps that the administration is taking to expand access to capital for small businesses. Senate Bill 1832 was introduced by Senator Mary Landrieu to implement the administration’s initiatives.

HIGHLIGHTS OF THE PROPOSED LEGISLATION INCLUDE:
• Increasing maximum 7(a) loan size to $5 million
• Increasing maximum 504 sizes to $5 million (non-mfg) and $5.5 million (mfg)
• Increasing maximum guarantee dollars to one applicant/affiliates to $4.5 million
• Extending 90% maximum 7(a) guarantee percentage through 10/1/2010
• Extending ARC Loan relief to existing SBA loans
• Increasing the maximum microloan loan size from $35,000 to $50,000

If enacted, the proposed legislation aims to stimulate SBA lending by:
• Extending the popular 90% guarantee for lenders
• Increasing the # of projects that can be financed with higher loan amounts
• Making extra guaranty funds available to those who have maxed-out their SBA guarantee allocations.

In addition, the SBA is also proposing an increase to the existing SBA size standards that will coordinate with the increased loan amounts pending in Congress.

This is the first comprehensive review of the SBA’s size standards in more than 25 years. The SBA press release regarding the new size standards can be found on the government’s Small Business Administration website www.SBA.gov.

The number two reason is that finance is not available.

For obvious reasons, a seller prefers cash. Tom West of Business Brokerage Press is a writer and analyst on small business transactions. According to West, his research has shown that sellers receive a significantly higher purchase price if they decide to accept terms or carry a seller’s note and that, on average, a seller who sells for all cash receives 69.9 percent of the asking price whereas if the seller is willing to carry some of the finance, the selling price will increase by 15.8%. For example, if a business is listed for $150,000, and the seller who is willing to carry some finance, they will receive approximately $24,000 more than the seller who is asking for all cash.

Applying the above but instead of looking at selling price but gross sales, West has found that a seller who asks for cash receives, on average, a purchase price of 36 percent of annual sales; compared to the seller accepting terms, who receives an average of 42 percent of annual sales.

To close this gap, seller financing can be the only solution which has more upside for the seller than they first may consider.

Apart from the benefit of the seller receiving interest on the note, the number one upside benefit for the seller is that tax is not paid on the money they receive from the buyer until it’s received. An accountant can break the tax position down in more detail but if the seller can delay paying taxes that’s a big plus.
The number two upside is that the seller can sell the note if there is an urgent need to obtain more cash. The note is bought for a discount on the face value of the note with the discount depending on different variables but include the length of time before the note is paid in full, the credit worthiness of the buyer and the history of buyer payments on the note. If the note is being cashed two years after the note was started and the buyer has been making note payments on time, this will help the seller get more for the note as the buyer has showed a capacity to pay it.
In addition to the financial reasons covered above, there are other reasons for a seller to offer seller finance. These include:

1. The chances of the business selling increase greatly.
2. It will attract a higher offer from the buyer than a cash offer because the buyer can repay the note from the earnings of the business.
3. It provides confidence to the buyer that the seller is prepared to “stand behind” the financial earnings of the business and the future success of the business including the buyer.
4. Interest rates on money on deposit with the bank are at their lowest rate in many years. Reasonable interest rates on a seller-financed deal will add significantly to the actual selling price.
5. With interest rates currently the lowest in years, sellers can get a much higher rate from a buyer than they can get from any financial institution.
6. There are tax benefits to the seller when accepting terms rather than those of an all-cash sale.

With all the positives, one of the greatest concerns of the seller is whether or not the buyer will be successful. However, if the buyer puts down a substantial deposit, the seller sees the buyer has strong motivation to succeed and will commit to the ongoing success of the business.

It is often difficult if not impossible for a buyer and seller to negotiate seller financing on their own. This is not only because of the emotions in the deal from each party but also due to the many ways to structure a seller-financed sale.
Your business broker with their professional skills can be of help by recommending a variety of payment plans that, in many cases, can mean the difference between a successful transaction and one that is not. Seller financing is a positive tool in a transaction as it creates a win/win scenario for both buyer and seller; and that’s what inevitably leads to the successful conclusion of any transaction.

The U.S. Small Business Administration is looking to offer more government-backed loans to commercial businesses.

The government agency has proposed increasing the size standards for 71 different types of businesses, two-thirds of them in retail trade sectors. The rest are in accommodations and food services and other services.

If adopted, more small businesses will become eligible for government loans and will have access to the SBA’s financial assistance, contracting and other programs.

“SBA has undertaken a comprehensive review of our size standards to ensure they are current and reflect changes in the economy and the marketplace,” SBA administrator Karen Mills said. “SBA’s lending and government contracting programs provide effective opportunities for small businesses to help them expand and create jobs, especially during these tough economic times. This review and proposed changes will help make these critical programs available to more small businesses and ensure SBA is in a position to be a real partner in helping our nation’s entrepreneurs and small business owners succeed.”

Between 2000 and mid-2007, there were more SBA lenders and BDOs than you could shake a stick at. In fact, so many that despite the strong economy, business was tough because each lender’s piece of the pie had shrunk to a relatively unprofitable level. We were tripping over each other, pricing loans at historically low margins, leveraging deals greater than in years past, accepting little or no collateral, poorer than normal credit scores, less than customary industry/business experience, etc.

Similar to the housing market, the SBA industry was lending at an all-time extreme.
Today, however, the pendulum has swung the other direction. Many (I want to say most) SBA lenders have left the business. I estimate that only 20% of us are still active in the market from its heyday. Sure, many lenders might still tout that they offer SBA 7a business acquisition financing but take at look at SBA’s year-to-date production list and they are nowhere to be found.

Why? There are many reasons but the most common and obvious is eroding and poorly performing portfolios, a less than profitable secondary market (less than 50% of its peak), illiquidity of the bank, and an overall tightening of bank credit policy, to name a few. Can you honestly blame a bank who, for instance, is having delinquencies in mass with its restaurant customers, its construction subcontractors, its tire store customers, etc., for not wanting to make restaurant, contractor, and tire store loans? Alternatively, can you blame a lender who (1) forecloses on a business, (2) thought they had $300,000 in 2nd Deed of Trust real estate collateral when they made the original loan, (3) liquidates the business’ assets at $0.03 to $0.05 on the dollar, and (4) appraise the house only to find there is $0 equity because it has eroded, and won’t finance unsecured business acquisitions any longer? In many cases, lenders who made risky business acquisition loans and are no longer entertaining them have essentially “thrown the baby out with the bath water.”

For those who remain, business is great, volume is high, and there are many strong deals out there. Personally, I have never seen more deals (some good some bad) in my 20 year career. In general, those who remain have common sense, see the recovery on the horizon, did not have high loan volumes in the past 5 to 8 years, do not have bleeding portfolios, understand the merits of the SBA program, and expect the secondary market premiums to come back.
If you are a business broker and need SBA financing for one of your clients, find a lender who is doing business acquisition deals right now. Although that sounds simple, the fact is you should not waste your time (time kills deals) with lenders who will spend a month saying NO. A seasoned common-sense lender should be able to structure and prequalify a project in one to three days or simply decline the deal. Fact is, it takes a seasoned lender about one hour to review a complete package and know if it’s a deal his or her bank will do.

Tips on getting your loans financed:

1. Find a lender who is seasoned, has common sense, doesn’t have a large and bleeding portfolio, and will entertain the industry of business you are selling.
2. When taking a listing, set expectation with your seller that they will have to carry a piece (10% to 30%) of the deal. PERIOD!
3. Expect greater than historic down payment (20% plus) requirements than historically were demanded. Fact is, there is likely less real estate collateral available from your buyer than in the past.
4. Price a business to yield greater than historic ROIs so as to improve the debt coverage ratio calculated by the lender. When valuing the business, weigh 2008 and the interim period significantly greater than 2006 and 2007.
5. Answer the question before it’s asked! Package (sell) your listing better by providing detailed explanations and supporting documentation of any changes, downward trends, one-time and recurring add-backs, salary savings/reductions, rent concessions, etc.
6. Be realistic of your expectations from a lender. Ask yourself if you would personally finance the deal, as it is structured, with the proposed collateral, the buyer(s) experience, and whether the credit is acceptable.
7. Don’t get mad at a lender for quickly declining a deal. Consider it a favor. Time kills deals and a good lender will decline a deal quickly and allow you to move on to another. Not all lenders finance all business acquisition deals.
8. Help keep the lender in business! As much as you might not want your buyer to go SBA, in many cases it is the necessary-evil.

By allowing lenders to properly structure financing to best suit what fits its portfolio, you are helping to preserve the lenders ability to continue operations. If lenders make enough bad loans they will be out of business. Help preserve those few left standing by treating the lender as a team member and by aiding in the structure of a deal (buyer’s down, seller’s carry-back, and lender loan amount have to at a win-win-win).

The opinions, beliefs and viewpoints expressed by the various authors for this newsletter do not necessarily reflect the opinions, beliefs and viewpoints or official policies of the California Association of Business Brokers.

Business sales are still taking place with sellers capturing attractive prices and favorable terms, when the deal is structured properly. 

Look at the buyer’s credibility
Of course, you want to find the best buyer possible. Whether it’s an individual, another company or a Private Equity Group, look for a potential buyer with business acumen, significant assets to pledge as collateral or a committed fund, as well as demonstrated success.

With a proven, credible buyer at the negotiating table, lenders are more likely to support the transaction. 

Expect some seller financing
Oftentimes during a tight economy sellers must share the risks with the buyer and the lender in order to achieve the highest value.

In many instances the value of a successful business is greater than the fixed assets. In today’s tight lending environment, a seller can still get a strong value for the business, but the seller may need to finance more of the purchase price than before. Regardless of the capital structure or finance considerations, professionally crafted and creative deal structure is the key during a difficult economy.

Typically, seller financing has been somewhere between five percent and 15 percent. With the current lending climate, seller financing may approach 15 percent to 25 percent amortized over 10 years with a balloon payment between three years and five years.

After the buyer has proven themselves in the business and shown that the debt payments will be made, the lender will generally refinance the seller’s note. As a result, the seller receives full payment within three years to five years and the lender gets to loan more funds to a demonstrated lower-risk borrower.

While the economy has put a crunch on available financing, it has not had a dramatic impact on the number of potential buyers. With the right structure, deals are still getting done across the U.S.

If you have a question about selling or buying your business, give Andrew a call today at (916) 570 2674. 

This article is reprinted as a courtesy of the International Business Brokers Association^® (IBBA.) IBBA is the largest international, non-profit association operating exclusively for the benefit of people and firms engaged in the various aspects of a business brokerage and mergers and acquisitions. IBBA^® has 1,950 members worldwide, with corporate headquarters in Chicago, Illinois.

This is the time when business savvy people don’t take cover but actually dig in. While some business owners are hiding from the possibly negative and money draining effects of a struggling economy, there are those who continue to look to buy and are finding that deals can still be done. 

Many business owners are concerned with the future and already have plans to sell in the next few years. They may be even more motivated to start the sale process now since businesses that are in the market are not selling as fast as in recent years. Buyers are discovering that business opportunities do exist, and that regardless of the state of the economy, deals are being done, they may simply require some creativity.

With credit markets as they are, banks are utilizing tighter lending and underwriting requirements for business acquisitions. Buyers and sellers must develop creative deal-structuring strategies that make transactions happen and provide future success. Seller financing helps with the capital structure, and has almost become a requirement by lenders in the current environment. Seller participation assures a prospective buyer and lender that the seller believes in the value and sustainability of the business.

Also, to remain competitive, many businesses could treat the down turn of the economy as a time to lay the foundations for future growth and the sale of the business when the economy rebounds. This may include a more global approach. Some regions of the world with advanced economies have escaped the effects of the credit crunch and those looking to create future successes may be able to capitalize on these global opportunities.

While there’s much doom and gloom associated with the current economy, opportunities do exist for those interested in buying or selling a business. For business owners, or would-be owners, it’s important to work with a qualified business transaction professional, like a Certified Business Intermediary (CBI) or Mergers & Acquisitions Master Intermediary (M&AMI). They can provide the proper guidance on developing deal strategy. 

If you have a question about selling or buying your business, give Andrew a call today at (916) 570 2674.

This article is reprinted as a courtesy of the International Business Brokers Association^® (IBBA.) IBBA is the largest international, non-profit association operating exclusively for the benefit of people and firms engaged in the various aspects of a business brokerage and mergers and acquisitions. IBBA^® has 1,950 members worldwide, with corporate headquarters in Chicago, Illinois.