As you may or may not know, the SBA does not lend funds to anyone, for the purpose of purchasing Businesses. Banks actually lend the money, while the SBA provides insurance of sorts, that it will put up to 80% of the amount loaned, should the Business fail.
This is a crucial thing for Business people to understand, for a couple of reasons. First, it is important that any Buyer understands that he/she is going to need to qualify with both the Bank and the SBA. It is a two-tiered process. SBA Preferred Lenders are financial institutions that essentially make all the decisions right there at the Bank, because the SBA has given them permission to qualify once, according to the SBA’s guidelines and regulations. Even though there is this two-tiered process, if the Buyer is dealing with an SBA Preferred Lender, it is not as though the application needs to be physically reviewed by the Bank, then processed over to the SBA for a second series of delays and qualification at another location. With Preferred Lenders, all the qualification work is done at one time, and in one place. There are multiple players involved, but it still streamlines the process.
That still does not mean that the two-tiered system is a piece of cake! We were in the process of selling a very large Liquor Store, and the Buyer decided he wanted to use his own Bank – which certainly he has the right to try to do. The Bank was a Preferred SBA Lender, but after five months of waiting, still had not given the Buyer a decision. All they kept saying was, “This is a great deal!” The Seller was obviously frustrated and demanded an answer, one way or the other, or he was going to terminate the contract. The Buyer confronted his Bank, and after five months of jerking him around, the Bank, finally said, “We are sorry, but we do not lend money for the purchase of Liquor Stores!”
This was not an SBA decision. This was strictly the bias of the Bank’s own Portfolio Manager, simply because she was personally, morally opposed to anyone drinking alcohol. The Buyer happened to have a great deal of money on deposit in that particular Bank, and though the Bank did not want to lend him funds for the purpose of purchasing a Liquor Store, they delayed the process for five months because they did not want to decline him, and have him leave the Bank in anger!
When the Buyer told us about we immediately put him in contact with another SBA Preferred Lender with which we had worked on several occasions, and the deal was completely funded and settled in 45 days. Once again, it had not been the SBA that was the holdup.
Many Business Sellers do not like the idea of selling their Businesses to someone who was going to use the SBA, to obtain funding for the acquisition. Unfortunately, unless the Buyer has several hundreds or millions of dollars stuffed in his/her mattress at home, there is no other way to obtain funds to purchase a Business. Commercial Banks will not do that, with Small Business purchases.
We are regularly asked by Sellers if we can find an “all cash” Buyer. Sometimes, this can be done. When we sell a Convenience Store, a Gas Station Dealership or other types of businesses, perhaps priced up to his much as $250,000, there are some circumstances where we find people with those kinds of funds. But frankly, even if someone has $250,000 in their checking account, in most cases they would prefer to leverage that money by using it as a down payment and ultimately purchasing a Business for perhaps $750,000 or more, with an SBA loan. It simply does not necessarily make good economic and financial sense to spend all of one’s money in buying something for cash, in that manner.
The resistance that Business Sellers have to the SBA comes from their fear or concern that such loans take an inordinate amount of time. Buyers hate the thought of using the SBA because they say it requires a mammoth amount of paperwork, in order to complete the application.
But the truth of the matter is that the SBA does not take a huge of time, if the applicant or his/her Broker or CPA knows how to complete the forms in an efficient manner. The vast majority of delays with SBA loans are because the application is provided inaccurately or incompletely. When the Bank or SBA has to go back and forth with the Buyer in attempting to get the information done correctly, it will naturally take a tremendous amount of time, because the SBA and Banks are both bureaucratic institutions. Because of the way we package SBA loans, we would normally get them through in about 45 days or even less; it can take a little more time if the purchase includes Real Estate. Such a delay of that type is normally due to scheduling issues for Real Estate Appraisals and/or Environmental Surveys.
From the Buyer’s side, yes it does take a fair amount of paperwork, in order to complete the application. But we are always amazed when people say that. Do Buyers really believe that a Bank or the SBA is going to provide $500,000 or $1 million in loans, without any such documentation? Without being asked specific questions about their ability to handle the funds? About the ability of the Business to make timely payments? Why does this seem so unreasonable?
Business Sellers, please do not fear the SBA. Do make certain that the Buyer and/or the Brokers involved are knowledgeable in the application process, so as to have the best probability of a positive result, in the most efficient manner possible. Ask where the Buyer plans to obtain his/her loan, and make certain that the Bank used is a Preferred SBA Lender.
And for your part, make certain that your books are in pristine shape. Make certain that your Corporate Tax Returns are up to date and that you have signed copies of them for the Buyer to take to the Bank. The Bank will want to see the last three (3) years of Company Tax Returns, plus current Financial Statements, (Profit and Loss Statements, and current Balance Sheet); they should be no more than 45 days old. If you take a paycheck, principally because you are an S Corp. or a C Corp., you should include your W-2 forms, for each of the Tax Returns you provide.
When you think about it, none of these things are unreasonable requests. All of these things can be done efficiently, particularly if you know about them in advance. Your Broker or CPA should be able to take you through this process, very quickly.
Keep in mind one other thing: Without the SBA, the only way to sell your Business is for you to act as the Bank, and take a note for the majority of the sale price. Suddenly, the SBA looks pretty darned good, and doesn’t it?
(The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service. Its Principal Broker possesses 25+ years of Business Sales and Divestiture. Although most of our work is involved in the Mid-Atlantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well. Some of our listings and additional information about us can be viewed at www.bafgroup.com. Or, you may contact us at combroker@bafgroup.com. Thank you for your interest.)
In 2007, we spoke to a number of Business Owners about selling their businesses. We spoke to them about the potential for a recession looming around the corner, principally because of what we saw as the “bubble” in both Commercial and Residential Real Estate. Many of them declined to sell at that point, stating that there businesses were simply doing “too well”, at that point.
As we moved into the deepest part of recessionary regression in 2008, many of those same people came back to us and then wanted us to sell their businesses, and sell them as quickly as humanly possible. Unfortunately, as we looked at their Financial Statements, the erosion of their Revenue and Profits suggested that the value of their respective businesses had dropped tremendously. They could no longer command the kind of Prices they might’ve enjoyed in 2007, and in some cases their businesses were unsalable, at almost any reasonable Price.
The moral of this is certainly not that we are blessed with some sort of crystal ball, and that what we say is tantamount to gospel! But there are certain rules of thumb regarding the timing of selling businesses that cannot be argued.
First and foremost is the fact that if you own a business, you always – emphasis on the word, “always” – want to sell when you are doing “well”. No one wants to buy your business when it is in a downward spiral. And even when the Revenue drops slightly, it creates alarm bells for a Buyer and his/her Lender.
Buyers and Lenders ask for Financial Statements for the past three (3) years, to determine historical trends on which a buying or lending decision is ultimately made. They want to see that the business has a stable financial record at the very least, and preferably shows growth throughout that trending period. Any decline of any kind raises concern. Is that decline a temporary one, or does it represent a larger, more long-term deterioration in business that will continue with the new ownership? The current owner may explain the reason for the drop in business and the fact that the decline is essentially behind him/her, but Buyers and Lenders cannot and will not take such an explanation as gospel.
They need proof, and that proof can only be borne out by a return to normalcy, as exemplified by Financial Statements. They are certainly not going to take the word of someone who’s business is in decline, and whose method of dealing with the difficulty is to get out.
This means that the Seller simply has to wait it out, rebuild profitability and then show financial statements that demonstrate the return of the business. Depending upon how much business has been lost in the decline, this could mean waiting a full Fiscal Year of resurgent business, or more. There are some mechanisms we have used to provide evidence that a business has been rebuilt in a credible way to a Buyer in less than a year, but Lenders are far more difficult an audience. They will frequently require at least a year of evidence that the business has been rebuilt to a satisfactory level, and that evidence is just as frequently only supported by a Tax Return, to that effect.
A second element of timing has to do with interest rates. When a Buyer makes a decision to buy a particular business at a particular Price, the amount of Cash Flow is one of the most critical issues. Cash Flow, in this case is loosely defined as the amount of money the Buyer can project at the end of each year, after all expenses have been paid except what he/she needs to pay Debt Service, followed by whatever is left to provide him/her with a Personal Income. Debt Service is further defined as what the Buyer will need to pay the Lender, on a monthly or annual basis, in order to purchase the business.
The Cash Flow is normally projected on the basis of historical profitability of the business, which obviously then goes back to the Financial Statements discussed above. The relative certainty over the ability to project Cash Flow is obviously then why the confidence in the stability of Revenue and Profits is such a vital concern.
The projection of the Buyer’s Personal Income is something that can also be projected, with relative ease. He/she knows what he/she pays in rent or house payments, car payments, utilities, average credit card payments, and so forth. If the business is purchased through an SBA loan, the bank will demand this information, in writing. The total of this amount is somewhat set in stone.
The amount paid for Debt Service is also somewhat set in stone. With the amount of average Cash Flow, minus the amount of Personal Income the Buyer requires, that net amount that results is the money left for Debt Service. From a Lender’s perspective, this is the dollar amount that is viewed with a certain amount of reverence. The Lender will require that this amount equates to the monthly or annual Debt Service, normally plus about 25% to provide the Buyer with a certain amount of working cash reserves.
And Debt Service itself can be broken down into the sum of payments made toward Interest plus Principle. This is where understanding the impact of Interest Rates is of critical importance to a business Seller.
Because we know that Debt Service is, as stated above, somewhat set in stone as a total amount, if Interest Rates rise, payments toward the Principal must come down, in order to meet that total. Business loans are almost always amortized on a 10-year term, so reducing the payments for the Principal by increasing the amortization is not an option. The only variable that remains is the Price paid for the business.
This means that, if Interest Rates rise, the Price paid for the business must come down.
This is where the politics of the US Government will radically impact any business that is for sale. Regardless of whether a Seller is a Democrat or Republican, understanding the dynamics of changes in the makeup of the Senate, the House of Representatives or the Presidency, and the impact of such changes on the economy and the Federal Reserve system, is critical in understanding when it might be time to sell a business.
Finally, any recession is liable to wreak havoc on a business sale. During recession of the 1980s, the Federal Government sought to ease the impact of the recession by devoting more resources in the way of SBA support to small businesses. Virtually any economist around will say that small businesses led the recovery of the economy, during that time. In 2008, the way the federal government dealt with the economy was largely to ignore small businesses, in favor of salvaging larger enterprises, such as AIG and GM. Whether this was right or wrong will not be argued, in this essay. But the net effect was the fact that small businesses suffered dramatically, and for a period of six months or more, the SBA was virtually out of business. The only way to sell a business at that point in time, was for the Seller to take a note.
As this is being written in mid-2015, the effects of some of the policies and practices of that time are still being felt. In many cases, Buyers cannot obtain an SBA loan from some of the largest, national banks; they are faced with going to local or regional banks to obtain those kinds of financing.
This post in our blog is being written well in advance of a changeover from the Obama Administration, but it is not too early for a Business Owner to contemplate selling his/her business before a new administration is put into place. Selling a business takes time; it is not like flipping a switch. The Business Owner that is been on the fence about doing so, should seriously think about doing that now. The Fed has already hinted that interest rates will probably rise in the fall of 2015, which will then probably have a dampening effect on prices that can be demanded for any given business, regardless of how well they might be doing, at this time.
Moreover, for the reader that may be viewing this post well after the 2016 elections should take all of this to heart, because this philosophy will not only impact a changeover from President Obama to whomever succeeds him; it will impact any interim or general election that might take place in the future, as long as Interest Rates themselves are not cast in stone.
(The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service. Its Principal Broker possesses 25+ years of Business Sales and Divestiture. Although most of our work is involved in the Mid-Atlantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well. Some of our listings and additional information about us can be viewed at www.bafgroup.com. Or, you may contact us at combroker@bafgroup.com. Thank you for your interest.)