SBA Update

Small Business Administration Loans

By: Bernard Siegel, Founder and Chairman, SFG Business Services

Highlights of the legislation include:

• Increase the loan limit on 7(a) loans from $2 million to $5 million.
• Increase the loan limit on 504 loans from $1.5 million to $5.5 million.
• Increase the loan limit on microloans from $35,000 to $50,000.
• Allow the 504 loan program to refinance short-term commercial real estate debt into, long-term, fixed rate loans.
• Extend the authorization to provide 90 percent guarantees on 7(a) loans and fee elimination for borrowers on 7(a) and 504 loans through December 31, 2010.
• Direct the SBA to create a website where small businesses can identify lenders in their communities.
• Increases the maximum guarantee on 7-A loans to $4.5 million
• Changes the eligibility criteria to  (a) a tangible net worth not to exceed $15 million and (b) the average net income after Federal Taxes over the past two full fiscal years is not more than $5,000,000.

The report still shows that the market is still far below where it was two years ago. Although bad, it is improving. The number of closed transactions in the third quarter inceased by 7.4% compared to the second quarter. It does seem to be turning around.

What does this mean to someone either buying or selling a business? Is this the right time to invest in a small company? Should I hold off selling my company until things really improve.

The most important step is determining your goals as a buyer or seller, and not letting the market dictate your timing. Unlike buying a stock, or going to a store during a sale, buying or selling a business is not instantaneous. In may take many many months for the transaction to complete. No one will be able to accurately predict what the market will do during that time. In the meantime, there will be buyers paying below and above market levels, and sellers selling below and above market values.

You need to determine the value you need to live your lifestyle, or what monies you need from the business. If you are buying, you need to evaluate risk and reward, and determine where your investment dollars can be best spent. If you are a company seeking to perform a strategic acquisition, you need to analyze if a business acquisition makes sense or not at a specific price in order for you to realize your business goals.

There are too many factors in the marketplace. Even if the economy comes back with a roar, will there be an oversupply of companies coming into the marketplace that will keep a lid on multiples? Will the economy only come back for a short window of time? No one knows the answers to these questions with certainty. Therefore you need to focus on what is certain – what is it you need from the acquisition or sale.

Ken Ducey, Jr.

Princeton Capital Strategies, LLC.

Beyond a Business Broker

“Strategic advice, first of all, has become broader than actually doing the deal” – Lazard chairman and CEO Bruce Wasserstein

I just got off the phone with a small business owner in Connecticut, who has owned his business in CT for over 20 years. He is very well networked within his industry, and knows who the likely buyers are for his business. He is a savvy businessman, with a lot of “deal” experience.

He wants to know why he should have to pay a business broker anything, no less the substantial fee most brokers charge. “Where is my ROI on that type of fee?”, he asks. Of course, that is a very legitimate question.

The common perception is that you really only need a Business Brokers to find the right buyer. Whereas that may be the case in certain circumstances, it is not the case with most of the deals we work on.  Princeton Capital certainly works hard in scouring the market for a buyer that will offer the highest price for a given company, don’t get me wrong, but we add a substantial amount of value beyond that.

But, what good is finding the right buyer if the deal does not ultimately come to fruition? How do you keep the buyer “honest” without getting a competing offer? Suppose you find a buyer willing to pay 10% more for a company, but the owner winds up paying 15% more in taxes? How much does it cost if the process takes 4 months versus the process taking 12 months?

In most “post-sale” studies I have seen, successful sellers have attested to the point made above. The planning for the sale, “hound-dogging” the deal process. quarterbacking the communications between the professionals, and advising on how various deal structures can effect the seller personally are all the major benefits of using a Business Broker.

Ken Ducey, Jr.
Beyond Business Brokerage

The reason our business started is due to the incredible inefficiencies involved in business transfers. No matter how you intend to leave your business, one way or another every business owner will eventually leave. But, according to a 2007 Mass Mutual survey, nearly a third of business owners do not have an exit plan. A PriceWaterhouseCoopers survey said 43% of their respondents had done little or no exit planning. This lack of planning will certainly leave money “on the table”, but it does not end there. Everyone from employees, customers, vendors etc are better served by a smooth business transition. This issue is problematic since it will increase over time; the first Baby Boomers turned 63 this year, and many of them are small business owners.

The most popular exit strategy according the PWC study was “Sale to Another Company”. According to Tom West, 20% of the 5.5 million businesses under $10 million in annual sales are for sale each year, and less than 25% actually sell.

Although there are many alternatives to selling to another company, for the purposes of this article we would like to focus on what business owners should be doing now in order to make their businesses more valuable to a buyer. These tips should help you run your business more successfully, and increase the likelihood of a sale, even if that sale is 5-15 years in the future.

1)      Systems Sell – Most small businesses purchased are bought by investors or owners who are seeking a reliable cashflow. Systems that are recorded, tracked, and proven give the prospective buyer confidence the business will continue to run smoothly, and therefore reduce the risk. This makes a business much more attractive and valuable to a larger group of buyers. This is why proven franchises such as a McDonalds sell for a high premium.
Systems can cover everything from marketing, hiring, developing, service, etc. If you begin to track and record your systems now, your business will be much more valuable later.

2)      Employees – If your business is all about you, it is not worth much at all. That translates to a significant amount of risk for the buyer. In addition, if the success of your company depends up a couple of key employees, there is a tremendous amount of risk. The goal is to make yourself as insignificant to the future of the company as possible. In addition, you need to make sure your employees are incented to stay with the company for the foreseeable future. This can be done with monetary or stock bonus plans, or something as simple as a non-compete agreement, or employee contract.

3)      Tax Strategies – We are not qualified to offer tax advice, but we can say we have seen an astonishing difference between the taxes paid on very similar businesses simply due to some pre-planning. There are too many strategies to list here, but suffice it to say you need to get qualified advice from someone who specializes in business transitions. Think about what a 10-20% difference means to you when you sell your business.

4)      Customers – Most businesses are their customers. If you have a diverse base of loyal customers, your business will be much easier to sell. If you are like most businesses, you have a high concentration of your revenue coming from a handful of customers. You need to come up with ways to put those customers on annual contracts, or long term incentive plans. In addition, try to get more revenue from your smaller customers. Can you introduce new products?

5)      Revenue – Bar none, companies with higher revenue are more likely to sell, and more valuable. Statistically, revenue is even more important than the profit percentage. Do whatever you can to get your business to the next revenue level. The levels we use are $1 million, $5 million, and $20 million. After realizing those revenue numbers, your company will be significantly more valuable, and saleable, than under those numbers.

Below is a list of five such essentials, which must be looked into when you set out to buy a business, so as to ensure that the post purchase period goes along smoothly.

1) Identify and explore – Each and every business is not a lucrative buying proposition for you. Keeping your strengths and weaknesses in mind, it is best to undertake a comprehensive and professional approach to identifying the type of business that will suit you the most. Just because it is a good business, it does not mean it is good for you. So, before you do buy a business, work with an agency that understands your needs and can provide extensive options in accordance with it. Explore not only ventures in your area but seek a wider approach of businesses that can be relocated in your search.

2) Business valuation – When you set out to buy a business, you need to hire experienced professionals to undertake an evaluation of the business being considered. You need to know exactly what the financial return on your investment will be, and where all the hidden costs might lie. Of course the seller will also have the venture evaluated before coming up with an asking price, but as a buyer you need to undertake this process on your front too. While there are many M&A brokers to do the job, hire one, which offers a combination of credibility, confidentiality and experience.

3) Test run- Just like when you buy a car; take the business being considered for a rest run. Most sellers are happy to assist in this task. Going through the various processes of the business personally, helps comprehend the problem areas, which you can tackle with preparation when the real task does start.

4) Legal issues – There are several agreements and deeds that will need to be looked into before you buy a business. The legality of the venture is of primary concern, as is the authenticity of the transfer documents. It will benefit immensely to keep a business broker or M&A intermediary along your side right through the entire process of buying a business.

5) Check and recheck – Irrespective of whether you are a strategic buyer, financial buyer, industry consolidator or even an individual buyer, always authenticate the facts that are provided to you, twice over. It is not everyday that you buy a business and depending wholly on agencies, lawyers or financial experts is not highly advisable. While it does help to work with professionals, also keep your own knowledge of the game at optimum level.

The tips listed above may seem like a tall order to follow, but do not fall into a trap when you set out to buy a business by ignoring them. Hiring the right team around you is crucial to sealing the deal.

Princeton Capital is a M&A intermediary business broker that has proven its metal in the business world. Not only is it recognized for its international database of buyers and sellers but is also highly valued for its immense credibility. Understanding the client’s needs for confidentiality, the firm places great value on ensuring that deals are never leaked out. The company does emerge as a perfect solution for those seeking professional as well as ethical M&A advice.

With that said, there are still fundamental marketing approaches that we implement with every business for sale that we represent.  (I am excluding preparing the business, or marketing materials, and just focusing on marketing venues due to the length of this article)  I believe that any successful marketing initiative for a business for sale in the middle or lower market, whether by a business broker or an M&A intermediary, must include these tasks.

General Mailing:  This is a “shotgun” approach that is effective when used in combination with the other initiatives.  There are businesses within general industry groups that would find your business a valuable add-on to their existing companies.  These are not always competitors, or people directly in your field.  These could be businesses that could greatly enhance their revenue with your customers, or greatly reduce their expenses with your suppliers.  They may be able to exploit some intellectual capital that you have.  The important thing is to take the time to think through the business types that could find value by purchasing your businesss.  Once you have identified this group, you will use your teaser and mail it out to them, using either US Mail or email.  Lists are readily available from D&B, infousa, and goleads among other sources.  You will also want to find lists from industry trade groups or industry publications. 

Lists of known buyers, investors, and Private Equity Groups:  Every M&A intermediary or businesss broker maintains a list of business buyers, investors, or Private Equity Groups  that have inquired with them about other businesses.  These can be some of the most qualified buyers for your business.  The approach to this group must differ slightly to the “shotgun” approach described earlier.  Many of these investors have very particular criteria, and your M&A advisor or business broker will know what those are.  The mailings must be somewhat customized to this group, highlighting the criteria they are looking for in a business or investment.

Bulletin Boards/Internet Sites:  These are one of the most popular methods that a business buyer will use to seek out a business for sale.  There are many of them, and I do not believe any one of them has a tremendous advantage in the marketplace today.  Some are better with businesses that are larger, and others are better for “Main Street’ types of businesses.

Strategic Buyers:  We discussed earlier the importance of this buyer type due to their willingness to pay the maximum value for their business for sale.  Because of that importance, your business broker or M&A Intermediary will need to have a one-on-one approach to this group.  You should identify 5-15 companies that are either competitors, or work in your industry, and would have a great deal of synergy with your company.

By marketing to these groups, you will be certain at the end of the process that you have approached a wide range of possible buyers, and found the buyers that are willing to provide you the most value for your business.  That assurance will go a long way toward minimize any regrets you have with the process.

Princeton Capital Strategies

www.PrincetonCapitalllc.com

Providing Value Beyond a Typical Business Broker

(888)613-4995

We never move forward with a buyer for a business without a letter of intent.  It helps considerably to move a deal to closing for many reasons, but I would like to explain the three main reasons below.

1)  You need to define the largest deal terms immediately to determine whether or not it is worthwhile to move forward.  When you agree with a potential buyer interested in your business for sale on the sale price, you could still be ions away from each other regarding the value of the deal.  You need to hammer out how the sale price was determined, and how the buyer will pay for it.  You need to know how long that buyer would like you to stay on, and under what conditions (salary).  If there is a loan, how will it be guaranteed?  If part of the payment will be in an earnout, how will that be computed?  There are a lot of factors in a purchase price that you want to get clarity on during these early stages, before you start opening up too much confidential information.

2)  It helps you to hold the buyer accountable to the original terms.  Most business sales take a minimum of three months to complete, most are longer.  Due Diligence is painful, and as the documents begin to get drafted, many issues come to the surface.  Many times the original deal terms become muddled and frankly even the buyer and the seller honestly forget where they started from.  The Letter of Intent is a written, unmodified, declaration of the intentions of the buyer that can be used to get a deal on track, or identify how far off track it has become.

It helps to qualify the real business buyers.  Any one can send you an email with a number and a couple of values in it.  Many buyers who do this are fishing to see what you will accept.  Most qualified buyers who are serious about buying your business will send you a formal Letter of Intent.  Serious buyers will typically take the time to think through the process carefully, and put the time in to develop an LOI to start the process of the right way.

Whether you are buying a business or selling a business, we strongly recommend you invest the time to put together a proper Letter of Intent for your middle market company.  It will go a long way toward making the process successful.

Ken Ducey, Jr.

Princeton Capital Strategies, Llc.

Providing Value Beyond a Typical Business Broker

www.princetoncapitalllc.com

When you have a Business for Sale, or are using a Business Broker or M&A Intermediary to sell your business, the ultimate scenario for you is what is called a “controlled auction”.

Unlike a piece of art, the way to get a premium price for your business is not through a typical “open cry” type auction.  Nor is it helpful in most situations to simply put a sign out front and announce to the world your business is for sale, and then play buyer against buyer.  The fact is because each middle market business is so unique, and the closing process so long, even though you might think you are getting a premium price most of the time you are not. 

Many of the serious, and qualified buyers will not even participate in an ”open cry” auction process, so from the start you are eliminating most of your best buyers.  In addition, people will not pay a premium until they have had time to really look into your company.  Finally, even though you start with a good price, you might get burned during due diligence when that buyer walks away, and you are forced to put the business back on the market with a “black eye” since you were unable to close the deal with the first buyer.

Businesses get a premium when they run a controlled auction for their company.  A “controlled auction” is still an auction, and you still use multiple buyers to boost up the asking price.  But, instead of a free for all, this process is controlled by an intermediary.

The intermediary plays many roles in this process.  One of the most important is with the preparation of the business.  Before anyone knows the business is for sale, you must create some type of dealbook or offering memorandum that details the business.  This document is only shown to buyers that appear to be qualified, and have signed an NDA.  It is so important becuase it puts all the buyers on the same playing field, giving them what they need to make a serious offer on the business in a short amount of time.  Otherwise, you might have one offer in hand that would like an answer, and yet the second interested party is still waiting on information from you before they can make a bid.

Secondly, it is the intermediary’s role to narrow the field of buyers, and get the best offer from each of them.  This is not accomplished by telling each buyer what the other is willing to pay in the hopes of getting them to outbid that buyer.  This will just scare the qualified buyers away.  Instead, the intermediary makes buyers aware that other buyer’s exist.  It is human nature to place a higher value on an object just because someone else would like it.  In addition, no one likes to lose.  Therefore an intermediary should make sure that each buyer knows this is a competitive process, and that there are other interested parties.

A properly run controlled auction can be a business seller’s best friend.

Princeton Capital Strategies, llc.

Value beyone a typical business broker

www.princetoncapitalllc.com

The quick answer is "Yes", it is important to develop an exit strategy as early as possible, even when you are starting your business.  The simple truth is there are many ways to make your business more valuable that are not that difficult.  You could develop long term employee contracts for your key employees, enlist some type of annual service agreements for your customers, document or register proprietary trademarks, patents, or other intellectual capital.

Times like these make it even more important.  Fact is, right now might not be the right time to sell.  Let's say you are in the construction business.  Most construction companies did not have a good year last year.  That translates to a buyer who will look to pay you a price based on a multiple of those depressed earnings from last year, even though your company could turn around tomorrow, and begin making earnings consistent with your historical profits.

Hopefully you don't have to sell immediately.  But, you should take this as a wake up call.  Some companies in your industry actually increased their revenue in 2008.  They will demand a primium for their business  for sale.  What did they do differently?  Were they specialized?  Did they have more diversification across their customer base or industry segments?  Do they have long term contracts with their customers?  Are they low cost suppliers of their service?

The key is to look at your business, and try to set it up in such a way that the business has consistent earnings.  Business buyers pay a large premium for consistency.  The turtle wins the race, not the rabbit.  When you go to sell your business, you will be paid a premium for relativelly small growth, vs. huge gyrations of large growth and flat years.

Princeton Capital Strategies, LLC

Providing Value Beyond a Typical Business Broker

wwww.PrincetoncCapitalllc.com

On the surface, we have often professed that a recession is the best time to start of buy a business for sale.  This is due to three main reasons:

Your competition is constrained, or eliminated.  No better time to attack the enemy than when they are weak.  They will not have the energy or resources to fight back.

Customers are looking for a new source.  Recessions and downturns in the economy force all people and entities to rething the way they are spending, and possibly remodel their businesses.  This means looking at their current vendors to make certain they are providing the maximum value.  You can get appointments with potential customers that you might not have been able to otherwise.

Your competition is not as flexible as you, and you can refocus your business to take advantage of opportunities that they could not.

employees, facilities, and even such things as furniture are much more availble and inexpensive

When the recession cycle ends, the business owner is able to ride the entire wave on the upside of the cycle, as opposed to only catching the wave halfway up, or at the top, thereby missing the tremendous growth curve.

The study looked at 8,500 companies lanuched between 1831 and 2006 that went public between 1975 and 2006.  The study measured "success" by whether or not the company had an IPO, or public offering in later years.

The results are somewhat confusing, since they did not track companies that did not go public – and therefore it is not known if these companies failed or were acquired by a larger entity.  The study did find that less companies are started in recessionary periods, and that a lower percentage of those companies eventually go public.  It summarizes by stating that "the relationship between company success and economic conditions at the time of a company's founding is not well understood"

Our experience has taught us that the best time to start up a company is during a recession.  We would be interested in hearing what you think.

Princeton Capital Strategies, LLC

www.PrincetonCapitalllc.com

Value beyond a typical business broker