As we go thru the second half of the summer, when things are usually pretty slow in our business because it is vacation season, we are pleased with the level of activity we are experiencing.
Customer traffic has picked up. Sellers are calling to consider listing their businesses for sale, and bankers are courting us again to bring them deals.
If you have been thinking of buying a business, and have some cash to use for a down payment, take a look at the listings on our web site. Be aware that a lot of the prices on businesses for sale have come down because of the slow last year in most of them. Also be aware that bankers are going to take a hard look at the deal and will be conservative in what they will finance.
In a lot of cases seller financing assistance is required and sellers are understanding that.
There has been a lot of publicity lately about Small Business Administration loan guarantee programs. The best news is that they are covering their own financing fees right now, leading to very significant savings in closing fees for loans they guarantee.
At a time when the political leadership of the country is claiming to make significant moves to improve the small business lending scene, and when they are telling us that small businesses are the backbone of the country, we are getting mixed signals from the Small Business Administration.
The recent announcement of moneys being made available to cover SBA guarantee fees, and the increase in the amount of a loan, in some cases to 90% that the SBA can guarantee, all sounded good and positive.
However - some middle level bureaucrat at the SBA has decided that the risk of guaranteeing loans for goodwill under the 7(a) program is too great, and that they should not guarantee such loans for any more than $250,000. This will have the impact of just about wiping out that program for all of the substantial businesses with employees that have benefited from such loans in the past.
Additionally there are a variety of other recently imposed standards that have left the lending community wondering how and what they can get approved for SBA guarantees.
This confusion is making the transfer of business ownership and the recapitalization of businesses even harder in these tough economic times.
We all need to emphasize to our political leadership and representatives that the new leadership of the SBA needs to get their programs back on track as soon as possible and reverse the recent damage done to these very important, even vital, programs to put small business financing back on track!
We frequently have customers call for information about businesses and in the course of finding out what they are looking for, and what they have for money, we are told that they have “backers”. Sometimes it is a relative, sometimes it is a close friend, and other times it is a casual acquaintance. They very often become upset with me when I tell them that in our experience “Backers always back out”.
I usually suggest that we will work with them when we have specifics about who the backers are and what they specifically will do. Then we ask them to bring their backers to meetings and showings so they can be involved right up front and throughout the process.
There are lots of horror stories shared between brokers about this phenomenon. One broker told me a story about having one customers eight business associate backers sign letters committing them to support, and then having them all pull out after he had worked a long time on the deal.
While such experiences are time wasting for us, the impact on the customers who are often embarrassed, disappointed, and have wasted a lot of time, can be really depressing.
That is not to say it is impossible to get family and friends backing. I had a deal not too long ago where family and friends put up 100% financing, almost $200,000, for a couple to buy a business. Just be prepared if you are a customer trying to be a buyer to have brokers be skeptical when you say you have backers.
The following is an excerpt on the subject from a blog by Richard Parker of the Diomo Corporation on the subject. Richard (no relation) writes extensively and publishes guides for use in buying and selling businesses based on many years of buying, operating, selling and brokering sales of small businesses.
“Getting the Money from Family and Friends When Buying a Business
Getting the money to buy a business is, oddly enough, one of the things that many buyers leave for the last minute. Perhaps it ties into the incorrect perception that traditional lenders have their vaults open ready to hand over money to you to buy a business.
Unfortunately, it is not the case. Not even close!
Today, I received an email from a website visitor explaining he has found a business, negotiated the deal and now is absolutely stunned and stuck to learn that his “investor”, his Uncle Max, doesn’t want to lend him the money.
This financial backer initially told him “I will lend you the money – don’t worry” (I really wish they had read my course because here’s what they would have learned):
If you are planning on having friends or family members finance your purchase, you need to understand it is a business deal. More importantly, you must be sure that they will be there to write the check when you need it. It is very easy for somone to off-handedly promise you the money, but it is a whole different ballgame when the time comes for them to fork over the cash.
If you are considering getting financing from your “Uncle Max”, keep a few things in mind:
Make sure Uncle Max’s criteria for agreeing to finance you is completely aligned with the type of business you are looking to buy.
Nail down the deal details with your financier before you begin negotiations with any seller.
Lay out very specifically what Uncle Max expects in return for his investment. Is it equity, debt, and what are the note terms, etc.?
Involve him in the process. Keep him updated. Analyze companies together. If a particular business is not of interest to Uncle Max, you want to know it early on.
Be completely upfront with any sellers or their brokers about the source of your financing. Simply telling them “My Uncle Max has plenty of money and will finance the deal” is not good enough.
Get Uncle Max to provide you with a letter acknowledging they will assist in the financing, and have him provide you with a Personal Financial Statement that you can offer sellers as proof to back up your claim.
While family and friends who offer to lend you the money are well-intentioned, and may even come through with the financing, do yourself a favor and don’t put your entire future in Uncle Max’s hands. There are many options available to finance a business. Learn what these are beforehand. When the right opportunity arises, you want to be in a position to pounce on it and get it done!”
You can find other interesting commentary by Richard Parker on: http://blog.bizquest.com
Here is a very timely IBBA article. Sellers are now going to be forced to do more financing in SBA Guaranteed deals under the new SBA guidelines, and should consider the many benefits of financing as much of the deal as possible (after of course a substantial down payment). Bank financing significantly raises the cost to the buyer and extends the time of sale. Where sellers can afford to finance the deal they can often get more because of the savings to the buyer, and can avoid a variety of delays caused by bank processes.
Don’t Forget to Consider Seller Financing
As baby boomers begin to hit retirement age, many who are business owners are ready to sell. It’s created a market that has many businesses for sale.
At the same time, concerns about the economy had made it tough to get financing for many potential deals. Seller financing is one option that could be the solution to get many deals done.
Seller financing involves a seller helping to finance the sale of the business by taking back a second note on the business. It differs from a traditional Small Business Administration (SBA) loan because the seller essentially extends credit to the buyer against the purchase price of the business. However, seller financing is misunderstood by many, even though it may be the best way to sell a business during a stagnant economy.
The most common option for seller financing involves secured notes, but other options also exist, including: unsecured notes, assumption of the seller’s guaranteed credit, assumption of capital leases, a real estate lease, earnouts, notes on capital equipment and more.
There are a number of benefits for business owners who are considering seller financing:
·Faster sale – Seller financing provide an attractive option for buyers which means that sellers can sell their business fast and at a higher price.
·Flexibility – Seller financing enables the seller to create a payment schedule, interest rates and loan period that fit their personal needs.
·Tax breaks – Taking a note for part of the business purchase price may provide a tax break for the seller. The seller can defer some of the tax due on the sale of the business until full payment is received, which could be several years down the road.
·Protections – Asking the new owner to keep the seller up to date with information like monthly profit and loss statements, workforce numbers, order backlog, inventory levels or other items with the monthly payment can be in the sale contract. The additional information allows the seller to keep track of the business and step in to offer advice or help if any problems are detected.
Working with a qualified business transaction professional, like a Certified Business Broker (CBI) or Mergers & Acquisitions Master Intermediary (M&AMI) is also recommended. Certified brokers and intermediaries can provide the guidance you’re looking for when considering seller financing or other financing options. They will help potential buyers and sellers develop a deal that is fair to both parties in the acquisition process.
The International Business Brokers Association® 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 week Forbes magazine rated Lebanon first, Keene third, and Concord, NH seventh in the top ten of a list of United States cities “least vulnerable” to recession, in a region that is relatively insulated from the national economic crisis. This region, and most of NH has maintained stability due to our low unemployment rate, strong banking sector, and relatively stable housing market .
Forbes used August unemployment figures from the Bureau of Labor Statistics and 2007 Census data on median income, poverty, education levels and outstanding mortgage debt to measure the economic resilience of 141 communities with populations ranging from 65,000 to 188,000.
Our local bankers did not pig out on sub prime mortgages, leaving that market to the mortgage brokers who are mostly gone now. So our local bankers still have money to loan to credit worthy businesses and other customers. They were often criticized as too conservative over the past few years, but now they are still there for us during the time most of the country is in a bad economic spasm. Credit is available! While the media has created a real hysterical mood among the public that will hurt most of our businesses to some extent, we are still in relatively good shape in NH.
Customers who would like to own a business ought to take a look at our inventory. If you have a down payment and a good credit rating you CAN buy a business NOW!
Our conventional wisdom is that a buyer for a business has to have at least 20% of the price in cash to put down, plus cover hefty closing costs.
In recent press reports we are all lead to believe that there is a “credit crunch” making it hard to get any credit for anything.
In spite of this, we recently (November 2007) completed a deal where the buyer got over $30,000 at closing from the bank. He was able to put that toward the cost of inventory, which cost a lot less. In other words, the buyer came out with money left over from the financing! A true “no down payment” deal!
It takes two things (at least) to do that. A lot of home equity and a business plan for the purchase that shows enough cash flow to cover the debt and still leave enough to live on. It also helps that the buyers spouse has a job with a good income.
But the point still is made very strongly that if you have a decent deal, a good credit rating, and the desire to buy a business, there is money available! Our local banks in New Hampshire didn’t pig out on the wave of sub prime and other risky mortgages. Most of the senior bank leadership lived through the crashes of the early 1990’s and learned from the experience. Call us for the name of the friendly banker for this deal. If you are looking in his part of the state, he is a great resource.
We still ask customers what they have for resources to put down, and we need to know your financial situation before we disclose lots of information about a business. But it is not always necessary to have lots of cash if you have other resources.
Even if you don’t have home equity you can now buy a business with the funds in a 401K if you do it properly.
Interest rates are still low by historical standards, and it is a great time to buy a business!
We have had several closings recently, and are being courted by bankers looking for deals to finance.
There is a lot of gloom and doom being spread by political candidates and the national media about the housing slump, credit crunches, foreclosures, and stock market volatility that is leading to customers thinking that they can’t get financing for deals.
I recently had to convince a customer to talk to a banker to get him to believe he could get financing and get him to make an offer on a business that he wanted to buy, and now has under contract.
Here in New Hampshire our local banks by and large did not get involved in the sub prime rackets that are bringing down the speculators and large mortgage brokers, so our banks are looking for ways to put money to work, and at rates that are still bargains in historical terms for commercial business loans.
Additionally the nationwide lenders who specialize in SBA guaranteed loans are still looking for business, because the ones we deal with are unaffected by the housing market problems.
So the bottom line is that if you can swing a 20% down payment, have a decent credit score, and the desire to own one of the businesses we have for sale you should be able to get financing.
Take a look at our listings and call us if you see something you want to investigate.
One of the first things we have to ask a potential buyer is how they plan to finance the purchase of a business. This usually leads to an education session about the terms that a buyer can expect to get on a business/commercial loan. Forget everything you have read or seen on television about “no money down” deals. Be ready to pay 20% down or more, be prepared for Adjustable Rate financing, and be prepared to provide personal guarantees.
Most of the deals we broker end up with local bank financing, and once in awhile financing is provided by a national lender specializing in SBA guaranteed loans. Frequently Seller financing is involved for some portion of the deal, and some times buyers end up drawing down credit cards or going to the “bank of family”.
In cases of Seller financing we always advise sellers to get enough down so that a buyer “will bleed if they walk away”. There is no set percentage to put down, it all depends on the deal. The horror stories we hear about sellers having to take back businesses that have failed usually involve previous sales with very low down payments, so that the buyers had minimal risk.
Our first suggestion is usually to go to the institution that currently holds a mortgage on the business involved, because they know the business and will usually be the easiest to deal with (unless the business is a distressed property).
Many of the deals we handle end up with SBA guaranteed financing. The bad news about that is that it increases the cost, both closing costs and loan rates, the good news is that deals get financed when they otherwise would not. When real estate is involved the most desirable financing often involves SBA 504 program loans processed thru development organizations, and straight business loans are usually guaranteed under the SBA 7(a) program. Full descriptions of the SBA programs are available on the SBA web site, http://www.sba.gov/aboutsba/index.html. We frequently have customers tell us they have been counseled by advisers not to accept SBA guaranteed loans because of past experiences. The SBA guarantee process now is very seldom any problem, and most of the horror stories involve customers who have bad credit or checkered histories, or businesses that have either high risk or very poor histories. The SBA programs are guarantee programs that reduce a lenders risk, so either a bank or other lending institution is always the real source of the money and has to first approve the financing.
During meetings with some local bankers on August 15th the rates they were quoting for loans that fit under the 504 program were in the 7% range, less than prime rate. Rates they were talking about for SBA 7(a) loans were in the 8% range. We have recently received proposals from other institutions offering rates of 10.5% to 10.75% on packages that included operating capital and involved as little as 10% down. Rates in the range of 2.5% over prime are common in business financing. Also most business loans will be at adjustable rates, so one important thing to look for is how long the initial rate is locked in before adjustments begin. Those terms may range from 3 months to 5 years, or more.
So it pays to shop around for a package that suits your needs. But expect financing to be a lot more expensive than residential (or even commercial) real estate, and be prepared to make serious down payments.
There is a lot of mythology floating around about business financing. Instead of listening to your back fence neighbor or the bartender down the street if you have questions about financing ask one of us, or a banker, (or better yet two different bankers).
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