Preparation for a Loan to Buy a Business

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.

Is It a Good Time To Sell Your Business?

It is no secret that the recent economic conditions have had a significant impact on most privately-held businesses over the past year or to. Not surprisingly, these same challenging economic conditions have also had a negative impact on merger and acquisition (M&A) activity. Thankfully, many privately-held businesses are beginning to see stabilization within their industries if not the beginning of a slow recovery. As a result, M&A activity appears to be on the rise. This is a good sign for all business owners, but particularly for those who are contemplating retirement in the next few years. Even so, there are a number of factors that impact the structure, timing, and valuation of a business sale. This includes the quality of the business, the number of qualified buyers, and the availability of financing.

Current Environment

Business quality – The quality of a business is still a key factor for attracting buyers. Now more than ever, acquirers are attracted to profitable companies with strong gross margins, loyal customers, tenured employees/management and attractive growth potential.

Many companies have been cutting costs to improve profits, but cost cutting has its limits. Once costs are optimized revenue growth is going to be the engine that impacts profitability. For example, we have seen businesses that have maintained their customer base over the past couple of years and have even gained new customers. Although their overall revenue and average revenue per customer is down from previous years, it is expected that the pent up demand from these customers will have a significant impact on future profitability as the economic environment improves.

Availability of qualified buyers – Some prospective acquirers perceive the current economic climate as an opportunity to expand or diversify their own business. And while some business owners believe that the only buyers right now are bottom feeders, this is definitely not the case. EBITDA multiples have decreased somewhat since 2007 according; however, strong companies are still being fully priced – because the demand for high-performing companies is definitely higher than the supply. In our own practice, we are currently negotiating deals that have multiple interested buyers.

In addition, private equity groups have cash to spend and are looking for opportunities. The amount of capital available for investment from U.S. private equity groups is at an all-time high with a gap of $400 billion between the amount of funds raised over the past few years and the equity invested.

Finally, some companies/industries have become even more attractive because they have proven their ability to perform well during the economic downturn. Health care, technology, and certain manufacturing companies are all enjoying this kind of increased attention.

Financing – Acquisition financing is more difficult to obtain than it was two years ago, but transactions are still getting done as lenders seek to finance deals that make sense. However, lenders are being more particular when it comes to approving buyers. They are looking for buyers who have relevant experience, a clear business plan and collateral assets.

Positive trends are important, and some lenders are interested in seeing a full-year on the books in 2010 – with improved performance over 2009 – before they will approve financing. In some cases, transactions may require more seller financing than was required in the past, so factor this into your planning. Even so, your goal should be to be substantially cashed out at closing.

Going Forward

The time to sell is when the business is steady or growing, the employee base and/or management team is stable and (perhaps most importantly) when an owner is ready based on his or her personal and financial objectives. This means sellers should understand what the market may be willing to pay for their business, and should plan ahead with a professional adviser to help determine the best time to sell.

Waiting a few years as the economy continues to recover is a valid strategy if the owners have a longer term retirement horizon. However, this may be an ideal time for planning an eventual sale. Business owners cannot control the external economic environment, so they should focus on the internal factors that can make a business more attractive. These factors include management succession, diversification of revenue, competitive or strategic advantages, opportunities for growth, asset base, and transparent financial records among others.

Trends are important when determining the right time to sell. If you do not have a system for tracking certain metrics and trends then this is a good time to implement one. Positive trends can demonstrate predictable or recurring revenue streams, and the ability to track such trends on a quarterly or even a monthly basis can be very valuable. The exact metrics to track depend on the type of business, but in general you should have the ability to track sources of revenue by customer, product/service and geography, as well as detailed costs and any other metrics that may be unique to your particular industry.

If you are contemplating a transition –  structuring a buyout by employees, or selling it to a third party – you should be asking and answering a host of specific questions. In our experience, we have realized that planning ahead and following a well-executed process can increase the value of a business by 10-30%.

I invite you to contact us if you are interested in planning a future sale. Our conversation will be strictly confidential, and I am sure it will be worth your time.

Sales Price vs Asking Price

A recent survey by BizBuySell, using their data, makes for not only interesting reading, but is very informative. BizBuySell, one of the leading websites which list businesses for sale, is providing a valuable service to all sellers by providing this date.

One  figure is significant because it bears out a figure from other sources. The chart in the BizBuySell report on small business sales price versus asking price came out at approximately 84 percent for 2011, just about the same as many other indexes.  This is a very valuable statistic. The BizBuySell report represents thousands of sales and therefore the percentage of asking price versus selling price is very meaningful.

When an offer is presented to a seller and is only 20 percent less than the asking price, the information in this report can help make a deal. And, certainly if the offer is only 10 or 15 percent less than the asking price, the results of thousands of closed deal should make a seller grab the deal. It’s pretty hard for a seller to argue with thousands of sales. What this figure strongly suggests is that businesses are listed for about 15% more than what they are really worth in the market place.

What Business is Right For You?

When you or your company decides to pursue growth through acquisition, you generally have certain criteria in mind. As you search the market for possible acquisition opportunities, you can be left with a lot of options. The question for you now is: Are you looking to buy the right business?

Let’s go back to the point where you are simply looking for a business to buy.  You have criteria – gross revenue and EBITDA targets, location in a certain region, a certain number of employees, etc. Surely, through due diligence and other methods, you would know if these numbers are realistic and if their projected numbers are indeed attainable.

Another (obviously) important criteria to consider is the industry. If you or your company is simply looking to expand operations, then you would certainly choose to buy a business within the same industry you are currently working in.  In that case, there wouldn’t be much adjustment on your part because you know the industry and how the market moves.

But what if your company is looking to venture into other fields? Surely you would choose a company whose sellers are willing to train you during the turnover process. However, you should be cautioned, they could never prepare you for everything that may happen down the road. If the company goes south, does it mean you chose the wrong business to buy?

Not necessarily. The economic circumstances that could lead your company to ‘failure’ do not make your decisions the wrong ones. When a merger fails, it could be management issues that lead to that situation. After buying the business, your company starts calling the shots. If they aren’t the best and most strategic decisions, there’s nowhere to point the finger.

By the end of the day, it all boils down to you, the buyer. Any business for sale could be the right business for you so long at it fits all of the criteria you have set. What’s more, it all depends on your mental/psychological capacity to run the business, your skill sets and the ability to integrate it into your current company.  It will be challenging but worth the rewards.