The SBA has finally realized the error of their ways and reversed their Standard Operating Procedure change enacted on March 1, 2009. The SBA, at a time when small business sellers and buyers needed them most, made the decision to limit the amount of goodwill a bank could finance in a business acquisition loan. The rules change restricted a lenders’ ability to finance goodwill under a 7(a) program for the lesser of 50% of the purchase price or $250,000, whichever is less. The effect of this change was catastrophic - causing the banking industry to essentially halt most, if not all, lending related to business acquisitions. In a business sale transaction the Goodwill is the amount of the purchase that is over and above the value of the fixed assets in a business. This SBA change was particularly acute given the fact that most US businesses are service based with the majority of value derived from Goodwill.
After months of lobbying by various industry groups the SBA has taken steps to correct their mistake. Effective October 1, 2009, the new rules will now allow for Goodwill and Intangible Assets as follows;
A) Financing of a loan with Less Than $500,000 of Goodwill is ALLOWED without Restrictions
B) Financing of a loan with More Than $500,000 of Goodwill is Permitted IF the combined equity from the Buyer and Seller is 25% or more of the Purchase Price
C) Financing of a loan with More Than $500,000 of Goodwill AND the equity from the Buyer and Seller is less than 25% MAY still be eligible, however it will require a full SBA approval under CLP and GP processing.
These changes combined with the SBA’s 90% loan guarantee to the banks is VERY positive news. It will take awhile for this change to filter through and impact small businesses but these actions are a big step in the right direction and to be applauded.
The challenge that will remain is the declining financial performance of many small businesses. Thus, business acquisition lending will probably not come back in a big way until the top and bottom lines of these businesses recover from the effects of the worldwide recession. The good news is that many small businesses have attacked their expenses through layoffs and the introduction other cost cutting measures and it may not take very long to see positive earnings when the economy turns around.
Showing posts with label bank loan. Show all posts
Showing posts with label bank loan. Show all posts
Wednesday, September 16, 2009
Sunday, July 26, 2009
Plan your Exit and Sell your Business at the Right Time
As a business broker one of the most concerning calls I receive is from a Seller who has not planned for his exit from the business. In fact, the Exit Planning Institute estimates that 90% of most business owners never planned the sale of their business. The impact of this lack of planning can range from very disappointing to disastrous.
A proper exit plan should include the input from all of your advisors and take a comprehensive review of your personal and business goals. A plan could take a year to design and several more years to implement prior to a sale. A well orchestrated plan includes setting financial goals, understanding the business value and drivers, business growth plans, business sale, tax optimization, wealth and death planning.
Financial Needs. Understanding the owners exact financial needs are critical to a meaningful plan. What will the owner(s) need to realize from the sale of a business, post taxes, to maintain the desired lifestyle.
Business Value. Obtain a snapshot of the business value and the key drivers. This step should be completed by an independent third party who is certified in valuing businesses. This value should then be used to calculate an owner’s net proceeds from any sale. This will answer the key question regarding timing of a potential sale.
Maximizing value. Continue to build value by optimizing the key drivers of the business. It is critical to continue to grow the business even after the decision has been made to sell the business. It can take 9 to 18 months to sell a business and during that period of time the business needs the owner to be fully engaged to ensure maximum value.
Going to Market. Assuming that a sale to an insider or family member is not viable, then this is the time to ‘confidentially’ take the business to market. You already know the value of the business and the structure that will yield you the net required to retire. Identify a business intermediary that can generate the largest number of potential buyers and manage your business through to a successful closing.
Have a Contingency Plan. As an entrepreneur you know from experience that even the best plans can unravel before your eyes. You need to be prepared for any number of things that can get in the way of you and your exit, i.e.; key employee departure, economic turmoil, owner disability, or any other unforeseen wrinkle. While you cannot plan for every conceivable problem, it is absolutely possible to build contingencies that contemplate the continuing operation of your business.
Managing the Proceeds. Understand what will happen with the proceeds from any sale. How will your money be managed to afford you the lifestyle you desire and minimize your tax liabilities.
Estate Planning. This step should consider the needs of the owners spouse and heirs. Not only how much money will be transferred but in what vehicles will the wealth be held to minimize the tax liability of the beneficiaries.
This type of plan requires a competent team of advisors who are committed to the exit planning process. Your team should include an attorney, accountant, wealth planner, insurance advisor, banker, business valuation expert and a business consultant. An exit planning team leader who has a process and the experience to lead these advisors to your desired outcome is a critical piece of building and executed a plan.
Planning the exit from your business will give you the best chance at maximizing your proceeds and achieving your post-ownership goals.
A proper exit plan should include the input from all of your advisors and take a comprehensive review of your personal and business goals. A plan could take a year to design and several more years to implement prior to a sale. A well orchestrated plan includes setting financial goals, understanding the business value and drivers, business growth plans, business sale, tax optimization, wealth and death planning.
Financial Needs. Understanding the owners exact financial needs are critical to a meaningful plan. What will the owner(s) need to realize from the sale of a business, post taxes, to maintain the desired lifestyle.
Business Value. Obtain a snapshot of the business value and the key drivers. This step should be completed by an independent third party who is certified in valuing businesses. This value should then be used to calculate an owner’s net proceeds from any sale. This will answer the key question regarding timing of a potential sale.
Maximizing value. Continue to build value by optimizing the key drivers of the business. It is critical to continue to grow the business even after the decision has been made to sell the business. It can take 9 to 18 months to sell a business and during that period of time the business needs the owner to be fully engaged to ensure maximum value.
Going to Market. Assuming that a sale to an insider or family member is not viable, then this is the time to ‘confidentially’ take the business to market. You already know the value of the business and the structure that will yield you the net required to retire. Identify a business intermediary that can generate the largest number of potential buyers and manage your business through to a successful closing.
Have a Contingency Plan. As an entrepreneur you know from experience that even the best plans can unravel before your eyes. You need to be prepared for any number of things that can get in the way of you and your exit, i.e.; key employee departure, economic turmoil, owner disability, or any other unforeseen wrinkle. While you cannot plan for every conceivable problem, it is absolutely possible to build contingencies that contemplate the continuing operation of your business.
Managing the Proceeds. Understand what will happen with the proceeds from any sale. How will your money be managed to afford you the lifestyle you desire and minimize your tax liabilities.
Estate Planning. This step should consider the needs of the owners spouse and heirs. Not only how much money will be transferred but in what vehicles will the wealth be held to minimize the tax liability of the beneficiaries.
This type of plan requires a competent team of advisors who are committed to the exit planning process. Your team should include an attorney, accountant, wealth planner, insurance advisor, banker, business valuation expert and a business consultant. An exit planning team leader who has a process and the experience to lead these advisors to your desired outcome is a critical piece of building and executed a plan.
Planning the exit from your business will give you the best chance at maximizing your proceeds and achieving your post-ownership goals.
Tuesday, July 14, 2009
CIT Bankruptcy will impact Business Acquisitions Financing
The potential bankruptcy and failure of CIT could prove disastrous to small business. CIT has been a significant force in lending to small businesses for start-up capital, working lines of credit, leasing and business acquisition loans. While CIT lending activity has been quiet for many months they have continued to provide a lifeline for many small businesses during the recent financial crisis.
CIT has petitioned the federal government for additional funds to maintain their liquidity. Thus far, the government has been slow to respond to this potential bankruptcy which I believe is critical mistake. There seems to be growing sentiment that other financial institutions will step in to fill the void left by a CIT bankruptcy. I have not seen any evidence that there are other banks willing to lend to small businesses. In fact, we continue to see loan requests put into a holding pattern and loan brokers have told us that the banks are showing no signs of life.
Small business owners with lines of credit from CIT are, and should be, very nervous right now. If a CIT credit line is cancelled I do not see any banks lining up to replace these loans. There may be a secondary market willing to fill this gap but it will come at a dear price to business owners in the form of exorbitant interest rates and onerous terms.
CIT may be too big to fail and the government should act quickly and decisively to avert derailing the timeframe of any economic recovery.
CIT has petitioned the federal government for additional funds to maintain their liquidity. Thus far, the government has been slow to respond to this potential bankruptcy which I believe is critical mistake. There seems to be growing sentiment that other financial institutions will step in to fill the void left by a CIT bankruptcy. I have not seen any evidence that there are other banks willing to lend to small businesses. In fact, we continue to see loan requests put into a holding pattern and loan brokers have told us that the banks are showing no signs of life.
Small business owners with lines of credit from CIT are, and should be, very nervous right now. If a CIT credit line is cancelled I do not see any banks lining up to replace these loans. There may be a secondary market willing to fill this gap but it will come at a dear price to business owners in the form of exorbitant interest rates and onerous terms.
CIT may be too big to fail and the government should act quickly and decisively to avert derailing the timeframe of any economic recovery.
Tuesday, June 16, 2009
Where are the Banks on Business Acquisition Deals
We have been working on a business acquisition financing deal with a local community bank in Illinois since March 2009. As of yesterday, the bank provided the following update –“it’s still on the table as a viable transaction”. This is a community bank where the loan committee is made up of the board of directors – seemingly a group of people who should be able to make a decision. Frustration does not even begin to explain how the buyer, seller, loan brokers and advisors feel about this situation.
When did ‘LIMBO’ become an acceptable response? It’s as if the bank is sitting on the fence waiting for some divine message – is this how our financial institutions are making decisions? We have received no questions or requests for additional information - just a cryptic message that this is a viable transaction.
The total loan request for this deal is under $200,000 – we are not talking about a multi-million dollar deal. The bank has stated they like the business, they really like the buyer and they believe this is a good fit. The buyer has a solid credit background and can easily fund the down payment. In addition, the seller has agreed to carry back a portion of the deal. All the elements that make for a good deal are present and accounted for – except for a motivated lender.
This deal should have been approved or denied within 30 days of receiving all documentation which was on April 10, 2009. We are now at June 16th and the deal is in purgatory. While I am singling out this community bank, in reality all of our deals are suffering a similar fate.
Without the ability to transfer wealth and business ownership there is a high likelihood that businesses will fold, jobs will be lost, tax revenues will shrink and the economy will continue to languish. The Obama administration and the Fed must devise a strategy to get banks back to the business of lending. Until this occurs any discussion of a recovery is just wishful thinking.
When did ‘LIMBO’ become an acceptable response? It’s as if the bank is sitting on the fence waiting for some divine message – is this how our financial institutions are making decisions? We have received no questions or requests for additional information - just a cryptic message that this is a viable transaction.
The total loan request for this deal is under $200,000 – we are not talking about a multi-million dollar deal. The bank has stated they like the business, they really like the buyer and they believe this is a good fit. The buyer has a solid credit background and can easily fund the down payment. In addition, the seller has agreed to carry back a portion of the deal. All the elements that make for a good deal are present and accounted for – except for a motivated lender.
This deal should have been approved or denied within 30 days of receiving all documentation which was on April 10, 2009. We are now at June 16th and the deal is in purgatory. While I am singling out this community bank, in reality all of our deals are suffering a similar fate.
Without the ability to transfer wealth and business ownership there is a high likelihood that businesses will fold, jobs will be lost, tax revenues will shrink and the economy will continue to languish. The Obama administration and the Fed must devise a strategy to get banks back to the business of lending. Until this occurs any discussion of a recovery is just wishful thinking.
Monday, May 4, 2009
No TARP money......No Problem
By now it has been well-documented that the TARP money is not making its way into the hands of small business owners. We continue to see small business acquisition loan requests routinely denied, and even worse, completely ignored by the banks. We sent a small business acquisition loan request to a regional bank and, while they acknowledged receipt, there was no desire to even respond. When we requested feedback we were told that the deal looked real nice and they would get back to us somewhere down the road. Our clients find that kind of non-response irresponsible and appalling. I receive daily inquiries from sellers wondering where all the TARP money has gone. It's a great question, and one we cannot answer.
The apathy shown by the banks could not come at a worse time. There are an enormous number of sellers NEEDING to re-capitalize their business, obtain working capital or sell for some human reason (retirement, illness, burnout etc.) Then, there are the swelling numbers of potential business buyers who NEED to buy a business. These potential buyers are largely middle-to-senior-level executives who have been downsized and the prospect of finding a job looks dim.
The good news is that business acquisitions are possible without the government and banks. In fact, there was a time when banks played a minor role, if any, in small business acquisition lending. So, we now see the market retraining itself on the practice of SELLER FINANCING. In essence, the seller fulfills the role the banks have played, and in the process, gains back control of their goals. For obvious reasons, this form of financing is met with trepidation by sellers. However, with the proper guidance from seasoned advisors, these types of transactions can be more lucrative and provide better security for both sellers and buyers.
One recent transaction will serve to illustrate the need for sellers to embrace the idea of seller financing. We confidentially represented a business services firm in the Chicago area that had a 17-year track record, a stable client base and growing revenues. Our firm attracted multiple buyers and secured an offer from a private investor with solid financials. The deal structure was as follows:
50% - Buyer Down Payment
25% - Seller Note
25% - Bank Note
This business had physical (hard) assets on the balance sheet that exceeded the amount being requested in bank financing. The sellers had a long-standing banking relationship and offered to introduce the buyer to their banker, who was very bullish on this deal. After several weeks of working with bank on what we were told was a ‘slam dunk’ loan request, it was DENIED. The explanation offered by the bank was that they discounted the assets by 60%, an arbitrary amount used by this particular bank, and that this was insufficient to secure a loan. Never mind that the business was well-established, generated significant cash flow after debt service and that the buyers were experienced in the business. Seems implausible, but true! The buyers and sellers were undeterred and we renegotiated the deal with the buyers. We increased their down payment and thus had the sellers fill the void left by the bank.
This type of financing requires tons of creative thinking, experienced advisors and motivated buyers and sellers. In our next blog we will cover both the benefits and pitfalls of this type of financing and how to ensure a successful outcome.
The apathy shown by the banks could not come at a worse time. There are an enormous number of sellers NEEDING to re-capitalize their business, obtain working capital or sell for some human reason (retirement, illness, burnout etc.) Then, there are the swelling numbers of potential business buyers who NEED to buy a business. These potential buyers are largely middle-to-senior-level executives who have been downsized and the prospect of finding a job looks dim.
The good news is that business acquisitions are possible without the government and banks. In fact, there was a time when banks played a minor role, if any, in small business acquisition lending. So, we now see the market retraining itself on the practice of SELLER FINANCING. In essence, the seller fulfills the role the banks have played, and in the process, gains back control of their goals. For obvious reasons, this form of financing is met with trepidation by sellers. However, with the proper guidance from seasoned advisors, these types of transactions can be more lucrative and provide better security for both sellers and buyers.
One recent transaction will serve to illustrate the need for sellers to embrace the idea of seller financing. We confidentially represented a business services firm in the Chicago area that had a 17-year track record, a stable client base and growing revenues. Our firm attracted multiple buyers and secured an offer from a private investor with solid financials. The deal structure was as follows:
50% - Buyer Down Payment
25% - Seller Note
25% - Bank Note
This business had physical (hard) assets on the balance sheet that exceeded the amount being requested in bank financing. The sellers had a long-standing banking relationship and offered to introduce the buyer to their banker, who was very bullish on this deal. After several weeks of working with bank on what we were told was a ‘slam dunk’ loan request, it was DENIED. The explanation offered by the bank was that they discounted the assets by 60%, an arbitrary amount used by this particular bank, and that this was insufficient to secure a loan. Never mind that the business was well-established, generated significant cash flow after debt service and that the buyers were experienced in the business. Seems implausible, but true! The buyers and sellers were undeterred and we renegotiated the deal with the buyers. We increased their down payment and thus had the sellers fill the void left by the bank.
This type of financing requires tons of creative thinking, experienced advisors and motivated buyers and sellers. In our next blog we will cover both the benefits and pitfalls of this type of financing and how to ensure a successful outcome.
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