Small Business Financing

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A recent report from the National Small Business Association (NSBA) revealed some surprising results from a survey of their members.  They report that only 65% of small businesses are able to obtain adequate financing.  This is down from 73% just six months ago.   The decrease in capital availability is in line with the slow growth in employment over the last 12 months as well as the low projections for the next 12 months.  Small business owners do not want to take on additional debt as the projections for growth of revenues and profits are a disincentive.

A Few Websites Worth Visiting Daily or Weekly

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If you are an entrepreneur with your own business or have ambitions to start your a business, you might  want to visit these websites for insights and help.

Inc. – This is focused on providing trends, ideas, and best practices around developing and growing a business. Passing along  the experiences and insights of other business owners, Inc can be valuable for your firm.

Entrepreneur – Some of the best of ‘how-to’ guides and examples, Entrepreneur provides content for all stages of business growth. Whether it is creating a business plan or revamping your sales team, there are articles.

Business Insider – Business Insider is an enjoyable balance of fun and valuable articles. With dozens of pieces published daily, it has some very interesting perspectives and information for daily and business life.

Why Do Deals Fall Apart?

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 In many cases, the buyer and seller reach a tentative agreement on the sale of the business, only to have it fall apart.

 

There are reasons this happens, and, once understood, many of the worst deal-smashers can be avoided. Understanding is the key word. Both the buyer and the seller must develop an awareness of what the sale involves–and such an awareness should include facing potential problems before they swell into floodwaters and “sink” the sale.

What keeps a sale from closing successfully? In a survey of business brokers across the United States, similar reasons were cited so often that a pattern of causality began to emerge. The following is a compilation of situations and factors affecting the sale of a business.

The Seller Fails To Reveal Problems
When a seller is not up-front about problems of the business, this does not mean the problems will go away. They are bound to turn up later, usually sometime after a tentative agreement has been reached. The buyer then gets cold feet–hardly anyone in this situation likes surprises–and the deal promptly falls apart. Even though this may seem a tall order, sellers must be as open about the minuses of their business as they are about the pluses. Again and again, business brokers surveyed said: “We can handle most problems… if we know about them at the start of the selling process.”

The Buyer Has Second Thoughts About the Price
In some cases, the buyer agrees on a price, only to discover that the business will not, in his or her opinion, support that price. Whether this “discovery” is based on gut reaction or a second look at the figures, it impacts seriously on the transaction at hand. The deal is in serious jeopardy when the seller wants more than the buyer feels the business is worth. It is of prime importance that the business be fairly priced. Once that price has been established, the documentation must support the seller’s claims so that buyers can see the “real” facts for themselves.

Both the Buyer and the Seller Grow Impatient
During the course of the selling process, it’s easy–in the case of both parties–for impatience to set in. Buyers continue to want increasing varieties and volumes of information, and sellers grow weary of it all. Both sides need to understand that the closing process takes time. However, it shouldn’t take so much time that the deal is endangered. It is important that both parties, if they are using outside professionals, should use only those knowledgeable in the business closing process. Most are not. A business broker is aware of most of the competent outside professionals in a given business area, and these should be given strong consideration in putting together the “team.” Seller and buyer may be inclined to use an attorney or accountant with whom they are familiar, but these people may not have the experience to bring the sale to a successful conclusion.

The Buyer and the Seller Are Not (Never Were) in Agreement
How does this situation happen? Unfortunately, there are business sale transactions wherein the buyer and the seller realize belatedly that they have not been in agreement all along–they just thought they were. Cases of communications failure are often fatal to the successful closing. A professional business broker is skilled in making sure that both sides know exactly what the deal entails, and can reduce the chance that such misunderstandings will occur.

The Seller Doesn’t Really Want To Sell
In all too many instances, the seller does not really want to sell the business. The idea had sounded so good at the outset, but now that things have come down to the wire, the fire to sell has all but gone out. Selling a business has many emotional ramifications; a business often represents the seller’s life work. Therefore, it is key that prospective sellers make a firm decision to sell prior to going to market with the business. If there are doubts, these should quelled or resolved.

Some sellers enter the marketplace just to test the waters; to see if they could get their “price,” should they ever get really serious. This type of seller is the bane of business brokers and buyers alike. Business brokers generally can tell when they encounter the casual (as opposed to serious) category of seller. However, an inexperienced buyer may not recognize the difference until it’s too late. Most business brokers will agree that a willing seller is a good seller.

Or…the Buyer Doesn’t Really Want To Buy
What’s true for the mixed-emotion seller can be turned right around and applied to the buyer as well. Buyers can enter the sale process full of excitement and optimism, and then begin to drag their feet as they draw closer to the “altar.” This is especially true today, with many displaced corporate executives entering the market. Buying and owning a business is still the American dream–and for many it becomes a profitable reality. However, the entrepreneurial reality also includes risk, a lot of hard work, and long intense hours. Sometimes this is too much reality for a prospective buyer to handle.

And None of the Above
The situations detailed above are the main reasons why deals fall apart. However, there can be problems beyond anyone’s control, such as Acts of God, and unforeseen environmental problems. However, many potential deal-breakers can be handled or dealt with prior to the marketing of the business, to help ensure that the sale will close successfully.

A Final Note
Remember these three components in working toward the success of the business sale:

  • Good chemistry between the parties involved.
  • A mutual understanding of the agreement.
  • A mutual understanding of the emotions of both buyer and seller.
  • The belief, on the part of both buyer and seller, that they are involved in a good deal

Value vs. Price

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Value is one thing. Price is a different thing.

We appraise every business we list so that the owner knows the “most probable selling price”.  Often we will take the opportunity to  market at a higher price to allow for a “premium buyer” or negotiations.

Many businesses we sell settle at more, or less, than the appraised value. This may result from the different motivations and negotiating skills of the parties. A seller compelled to sell urgently through illness may not maximize the price received because we are unable to carry out a full marketing program.

Conversely, a buyer may pay top price because the business offers special benefits for that particular buyer, e.g. location.

Apart from motivations and negotiating skills the deal structure can greatly influence price.

Finance – an old saying is “you can name the price, if I can name the terms”. With banks still not crazy about lending for business purchases on reasonable terms and conditions, we are finding vendor finance more common than in the past. This can be a win-win for the parties.

The buyer can secure a larger business, and the seller can receive a better return by investing in something he/she knows.

Earn-outs have become increasingly common in some sectors. With these, part of the purchase price is withheld for a period of time subject to certain sales or profit targets being met.

Employment, or on-going consultancy can also affect price. A business owner may wish to “cash out” but be happy to continue working for the new owner on a part-time or full-time basis, or provide consultancy services. These arrangements can provide security for the new owner (e.g. retaining relationships) plus cash flow and employment for the exiting party.

A well-thought out deal structure can benefit everyone – maximizing price for the seller, minimizing risk for the purchaser, and rewarding the business broker for a successful transaction.

Who Are Potential Buyers?

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Once a business owner has made the decision to sell, he or she should be aware of the variety of possible business buyers. Just as small business itself has become more sophisticated, the people interested in buying businesses have also become more divergent and complex. The following are some of today’s most active categories of business buyers:

Family Members

Members of the seller’s own family form a traditional category of business buyer – a category of buyers that is “tried” but not always “true.” There is something appealing about a family member taking over the business. There is a sense of keeping the business in the family and an assumption that such an arrangement will translate into the prime advantage of continuity. Continuity may in fact be the result as long as the family member buying the business treats the role as something akin to a hierarchical responsibility. This can mean years of planning and diligent preparation, involving all or many members of the family in deciding who will be the “heir to the throne.” If this has been done, the family member may be the best type of buyer.

Too often, however, the difficulty with the family member as buyer lies in the conflicts that may develop. For example, does the family member have sufficient cash to purchase the business? Can the selling family member really leave the business? In too many cases, these and other conflicts result in serious disruption to the business itself and/or to the sales transaction, not to mention the impact on family relationships. An outside buyer eliminates these often insoluble problems.

When considering a family member as a buyer, a business owner should carefully evaluate three factors: ability, family agreement, and financial worthiness.

Business Competitors

This is a category often overlooked as a source of prospective purchasers. The obvious concern is that competitors will take advantage of the knowledge that the business is for sale by attempting to lure away customers or clients. However, if the business is compatible, a competitor may be willing to “pay the price” to acquire a ready-made means to expand. A business brokerage professional can be of tremendous assistance in dealing with the competitor. They will use confidentiality agreements and will reveal the name of the business only after contacting the seller and qualifying the competitor.

The Foreign Buyer

Many foreigners arrive in the United States with ample funds and a great desire to share in the American Dream. Many also have difficulty obtaining jobs in their previous professions, because of language barriers, licensing, and specific experience. As owners of their own businesses, at least some of these problems can be short-circuited.

These buyers work hard and long and usually are very successful small business owners. However, their business acumen does not necessarily coincide with that of the seller (as would be the case with any inexperienced owner). Again, a business broker professional knows best how to approach these potential problems.

Synergistic Buyers

These are buyers who feel that a particular business would compliment their business and that combining the two would result in lower costs, new customers, and other advantages. Synergistic buyers are more likely to pay more than other types of buyers, because they can see the results of the purchase. Synergistic buyers seldom look at the small business, but they may find many mid-sized companies that meet their requirements.

Financial Buyers

This category of buyer comes with perhaps the longest list of criteria and demands. These buyers want maximum leverage, but they also are the right category for the seller who wants to continue to manage his company after it is sold. Most financial buyers offer a lower purchase price than other types, but they do often make provision for what may be important to the seller other than the money—such as selection of key employees, location, and other issues.

For a business to be of interest to a financial buyer, the profits must be sufficient not only to support existing management, but also to provide a return to the owner.

Individual Buyer

When it comes time to sell, most owners of the small to mid-sized business gravitate toward this category of buyer. Many of these buyers are mature (aged 40 to 60) and have been well-seasoned in the corporate marketplace. Owning a business is a dream of theirs, and one many of them can well afford. The key to approaching this kind of buyer is to find out what it is they are really looking for.

The buyer who needs to replace a job can be an excellent prospect. Although owning a business is more than just a job, and the risks involved can frighten this kind of buyer, the buyer without a current job will have the “hunger” necessary to take the leap. A further advantage is that this category of buyer comes with fewer complications than many of the other types.

A Final Note

A business intermediary has the experience needed to sort out the “right” type of buyer.

Preparation for a Loan to Buy a Business

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At this point, you are either still looking for a profitable company to buy or have settled already in acquiring a certain company. Whatever you status is, the next essential thing you need at this point is money – funds to purchase the business you are eyeing. This is where business loans come in.

Since President Barack Obama signed into law the Small Business Jobs and Credit Act last month, reports state that loans backed by the Small Business Administration (SBA) increased by 30 percent for this year. When SBA ended its fiscal year, it had approved $16.84 billion, or 54,826 small business loans. This was within the past 12 months. The increase is attributed to the measures enacted by last year’s stimulus, which eliminated fees and increased the government’s maximum guarantee to 90%, up from 75%-85%.

The other side of the coin however, is that many businesses that filed for a loan were denied. Why so? Based on the study conducted by the Federal Reserve Bank of New York during June and July of 426 small-business owners, it found 59% of small businesses wanted credit, and half of those were denied. In addition to the small businesses that got nothing of what they sought, about 75% of those surveyed said they received “some” or “none” of the credit they wanted.

In an interview, Kausar Hamdani, Senior Vice President and Community Affairs Officer said, “Until now, we’ve only heard anecdotally about difficulties for regional small businesses in obtaining credit without any numbers to confirm this.” Meanwhile, Bernard Clineburg, Chief Executive of Cardinal Bank, said in her interview with MarketWatch, “As a bank that wants to make small business loans, we can’t find the borrowers…qualified borrowers are hard to find.”

Then what can you do to make your company more qualified? Here’s what we found out.

Be well-organized financially. As they say, talk is cheap. Lenders prefer to see things in black and white. It’s best to present to your lender your annual and interim financial statement, tax returns from the past three years and of course, your business plan, stating where your company has been and where it is headed. Of course, you should state that you intend to buy a business.

Be ready to tell your story. If your company survived the financial downturn, then you are worthy of a loan. What could set you apart is how you managed to survive and how you paired up compared to your competitors.

Transparency. It’s a cliché, but ‘honesty is the best policy.’ If you had unappealing credit history, your company shouldn’t hide it, instead bring it up front and explain the situation. After all, banks will find out about it once they check on your lending records.

Be realistic. Like any other loans, companies should be prepared to put up collateral for their loan. Percentage may vary but 15 to 30 percent is ideal.