Here’s the New $600 Billion Federal Reserve Lending Program for Businesses

William Bruce talks about new $60 billion loan program for pandemic victims.

The Fed has budgeted $600 billion for the new loan program.

For some reason, this new loan program for businesses has not received much attention.  But $600 billion has been allocated for the project, so if you’ve been hit hard by the pandemic, it might be a lifesaver.

The name of this new program, The Main Street New Loan Facility, is somewhat of a misnomer.  The maximum allowed annual revenue that business can have and still qualify for a loan is $5 billion.  I’m not aware of any “Main Street” business that has that kind of revenue!

But regardless, it’s a new program by the Federal Reserve to assist businesses that are trying to recover from the Coronavirus pandemic.

As the Fed explains it, the Main Street New Loan Facility (“Facility”) is intended to facilitate lending to small and medium-sized Businesses by lenders.  An eligible lender is a U.S. federally insured depository institution (ie: banks, savings associations and credit unions).  The Fed will buy 95 percent of the loan from the lending institution.

An eligible borrower is a business that

  • was established prior to March 13, 2020,
  • is not an ineligible business (ie: banks; life insurance companies but not         independent agents, finance companies; factoring companies; investment companies, bail bond companies; and any other businesses whose stock in trade is money),
  • meets at least one of the following two conditions: (1) has 15,000 employees or fewer, or (2) had 2019 annual revenues of $5 billion or less,
  • is created or organized in the United States with significant operations in and a majority of its employees based in the United States, and
  • does not also participate in the MSPLF, the MSELF, or the Primary Market Corporate Credit Facility; and has not received specific support pursuant to the Coronavirus Economic Stabilization Act of 2020.  (PPP loans are OK.).

Loan terms:

  • 5 year maturity
  • principal payments deferred for two years and interest payments deferred for one year (unpaid interest will be capitalized)
  • adjustable rate of LIBOR (1 or 3 month) + 300 basis points
  • principal amortization of 15% at the end of the third year, 15% at the end of the fourth year, and a balloon payment of 70% at maturity at the end of the fifth year;
  • loan size can be from $250,000 to $35 million
  • is not, at the time of origination or at any time during the term of the loan, contractually subordinated in terms of priority to any of the borrower’s other loans
  • prepayment permitted without penalty.

Other requirements and conditions:

  • Borrower must commit to not repaying principal or interest on other loans until the Facility loan is paid in full unless the debt or interest payment is mandatory and due.
  • Borrower must commit that it will restrict compensation, capital distributions to owners per the issued guidelines.
  • Each borrower that participates in the Facility should make commercially reasonable efforts to maintain its payroll and retain its employees during the loan term.
  • A lender will pay the Fed a transaction fee of 100 basis points of the loan amount at the time of origination. The lender may require the borrower to pay this fee.
  • A borrower will pay a lender an origination fee of up to 100 basis points of the amount of the loan at the time of origination. The Fed will pay a lender 25 basis points of the principal amount of its participation in the loan per annum for loan servicing.

There are many other details.  Speak to your banker to see if you qualify.  You’ll be dealing with the government so a word of warning: expect some confusion and delay.

Please don’t hesitate to call or email if my office can be of assistance.

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William Bruce is an Accredited Business Intermediary (ABI) and Senior Valuation Analyst (SVA) assisting buyers and sellers of privately held businesses in the transfer of ownership.  He currently serves as president of the American Business Brokers Association.  His practice includes consulting services nationally on issues of business valuation and transfer.   He may be reached at (251) 990-5934 or by email at Will@WilliamBruce.org. 

 

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Giving a Shoutout and Thanks to the Invaluable Healthcare Workers During this Covid Mess!

William Bruce salutes and thanks healthcare workers.

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Considering Buying a Business? Here Are the 6 Most Frequently Asked Questions.

If you’re considering buying a business of your own, it’s natural that you would have lots of questions about the process.

William Bruce, President
American Business Brokers Association

I’ve been a business broker for over three decades.  During these enjoyable times, I’ve had the opportunity of assisting many individuals in achieving their goal of owning a business of their own.

In this work, I’ve found that many buyers of businesses have the same questions.  So I thought I’d list those questions that I’m most frequently asked along with my responses.

Why would a good business be for sale?

Answer by William Bruce: I have found that some buyers think that if a business is for sale, there must be something wrong with it.  This is sometimes true, but most businesses are for sale for legitimate reasons including retirement, health problems, family issues and burnout.  Burnout after many years of operating a business is real.  I experienced it years ago after owning a heavy equipment dealership for almost 20 years.

How will I know if the asking price of the business is reasonable?

Answer by William Bruce:  This is a very good question.  There are fairly simple guidelines for closely estimating the value of many types of small to medium size businesses.  These rules-of-thumb vary by category of business, but usually seek to estimate value (1) by applying a percentage to gross annual revenue of the business or (2) applying a multiple to the discretionary earnings of the business.

For example, we know that a full-service restaurant will most likely be valued at around 30 percent of gross annual revenue, assuming that the bottom line earnings support that appraisal number.

We also know that the majority of businesses will appraise for somewhere in the range of 2 to 3.5 times discretionary earnings.  As just two examples, a convenience store will appraise at approximately 2.25 times discretionary earnings plus inventory at cost, and a lawn maintenance service valuation will average about 2.75 times discretionary earnings.

Written and fully documented business valuations are also available for a reasonable cost from several highly respected national business valuation firms.

For further reading on this issue, please see this article.

What are discretionary earnings?  Is it the same as cash flow?

Answer by William Bruce:  The terms “discretionary earnings” and “cash flow” are used interchangeably by business buyers, sellers and brokers to refer to the total owner’s benefit from owning the business, regardless of how the owner takes the money out of the business (salary, draws, perks, etc.).  It’s the cash left over after only the necessary operating expenses of the business are paid.

CPAs sometimes refer to the process of computing discretionary earnings as “normalizing” the profit and loss statement.  The computation removes the camouflage from the bookkeeping practices of most business owners.

For an article on how to compute discretionary earnings, please see this article.

 How do I finance the acquisition of a business?

Answer by William Bruce:  There are five possible sources of financing for buying a business including (1) banks, (2) SBA-guaranteed loans, (3) the seller of the business, (4) family and (5) in recent years a new program that allows you to use your 401(k) or IRA funds to buy a business without an early withdrawal penalty.

For a discussion of the pros and cons of each of these options, please see this article.

How much down payment do I need?

Answer by William Bruce:  It depends on several things but between 25 and 35 percent should suffice in most situations.  You should also have in reserve for working capital about two months operating expenses of the business to get you comfortably over the initial timeframe.

What is due diligence?

Answer by William Bruce:  Due diligence is a fancy term.  In practical use, it can be summarized as that phase in the purchase of a business when you have access to all the books and records of the business (1) to verify the accuracy of the information that you’ve previously been furnished and (2) to make sure that there are no serious, undisclosed problems with the business.  It’s customarily done after a buyer and seller have agreed upon price and terms, with the completion of the transaction fully contingent upon a satisfactory due diligence investigation.

For a more thorough explanation, please see this article.

For a comprehensive discussion of these and other issues involved in buying a business, you can order William Bruce’s complimentary 62-page booklet “How to Buy a Business in a Safe & Organized Way.”  The booklet walks you through step-by-step the process of buying a business to make sure you get what you pay for.  To order, please click here.

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William Bruce is an Accredited Business Intermediary (ABI) and Senior Valuation Analyst (SVA) assisting buyers and sellers of privately held businesses in the transfer of ownership.  He currently serves as president of the American Business Brokers Association.  His practice includes consulting services nationally on issues of business valuation and transfer.   He may be reached at (251) 990-5934 or by email at Will@WilliamBruce.org. 

Follow William on Twitter and LinkedIn.

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How to Use the SBA to Buy a Business

Information on how to use SBA 7(a) loan to buy a business.

The SBA 7(a) program is a popular loan option for buying a business.

Except for the SBA 7(a) program, banks generally do not make loans to individuals to buy a business.  This statement will surprise a lot of people.

Most people will think first of a conventional bank loan when seeking financing to buy a business.  But I can tell you from decades of experience, this just doesn’t happen often.  The bank’s advertising will lead you to believe they do, but they will usually find some reason not to make a business acquisition loan.

However, after you’ve bought the business and been operating for a while, the irony is this:  The same banker that turned you down for a loan to buy the business may come by your office soliciting your business.

But fortunately for individuals considering buying a business, participating banks have the Small Business Administration 7(a) loan program to offer.  Except for some specialized programs, the SBA does not make direct loans to borrowers.  Instead, the SBA guarantees a percentage of the principal amount that the bank loans to you.  In a practical sense, the SBA is co-signing the loan with you at your bank.

What is the SBA 7(a) loan program?

It is the SBA’s most popular business loan program.  To be eligible for such a loan to buy a business, the borrower and the business must:

  • Operate for profit
  • Be small, as defined by SBA
  • Be engaged in, or propose to do business in, the United States or its possessions
  • Have reasonable invested equity
  • Have a minimum personal credit score of 660
  • Use alternative financial resources, including personal assets, before seeking financial assistance
  • Be able to demonstrate a need for the loan proceeds
  • Not be delinquent on any existing debt obligations to the U.S. government
  • An independent, third party valuation of the business must meet or exceed the agreed upon acquisition cost.

Additionally, after deducting a reasonable salary for the owner, the business being acquired must produce a net cash flow of 1.25 times debt service.

Some banks do not participate in the SBA loan programs, but fortunately many national, regional and community banks do participate.  Some banks are designated by the SBA as “Preferred Lenders” which means they have a streamlined application process and more local underwriting authority.  My experience is that you’re much better off using a Preferred Lender compared to a bank that only processes a few SBA loans per year.  The top 100 most active SBA 7(a) lenders can be found here.

Admittedly, the SBA loan application can be time consuming and sometimes frustrating.  But keep in mind, the SBA-backed loans are approved in a lot of instances where no other financing options are available.

Amount Available, Down Payment Required, Interest Rate and Collateral

Interest rate on SBA 7(a) loanThe maximum amount that can be loaned under the program is $5 million. The average loan amount in fiscal year 2018 was about $425,000.  Interest on the loans is negotiable with the SBA setting the maximum rate that a bank can charge.  As this is being written, the average rate for loans over $50,000 is 6.00 percent, give or take.

The down payment required is usually 15 to 20 percent of the price of the business being acquired.  Some lenders will allow a portion of this downpayment to be covered by a seller note (ie: a note payable from the buyer of the business to the seller for a portion of the acquisition cost).  SBA restrictions on this seller note usually do not allow repayment of principal and interest for a stated period of time.

The length of the loan for business acquisition can be up to 10 years, or for real estate, the term can be up to 25 years.

There are fees involved in applying for a 7(a) business acquisition loan but in many cases, these fees can be added into the loan amount.

Banks love collateral and will usually reach out and grab whatever collateral is available; collateral required for SBA7(a) loanhowever, many lenders will approve a SBA 7(a) loan even when there is less than 100 percent available collateral coverage.  Some banks are more “cash flow lenders” than others, meaning that they will look more to the future earnings of the business being acquired as collateral for the loan rather than current hard assets.

My office stays up to date on the loan preferences and appetites of many lenders.  If you need a recommendation of a bank most suited for your particular situation, just shoot me an email at Will@WilliamBruce.org.

For further reading, here are additional related articles:

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William Bruce is an Accredited Business Intermediary and Appraiser assisting buyers and sellers of privately held businesses in the transfer of ownership.  His practice includes consulting services nationally on issues of business valuation and transfer.  He currently serves as president of the American Business Brokers Association.  He may be reached at (251) 990-5934 or by email at Will@WilliamBruce.org. 

 

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My 7 Favorite Phone Apps.

This column is usually devoted to business issues, but today I’m sharing my favorite phone apps that make my daily life easier.

I’m not as tech savvy as many of my friends, so my favorite apps tend to be more utilitarian than whiz-bang.  With that in mind and for what it’s worth, these are the ones I use the most.

Google Maps is a favorite app of William BruceGoogle Maps – Previously, I relied on Waze for driving directions until it took me on a wild goose chase through the piney woods of the Florida Panhandle.  Now, after switching to Google Maps and using it for several weeks, I’ve decided it’s the superior app.  Very reliable.

WeatherBug is a favorite app of William Bruce.Weather Bug – This is the best weather app that I’ve found: concise, understandable, accurate and easy to navigate.  You can check your hometown weather of course, but also the weather and forecast for anywhere around the world.  It worked well in Scotland on my last trip abroad.

My Radar – And speaking of weather, this is a handy radar app.  It has vivid displays of rain and its intensity.  You can also overlay wind directions and temperatures.  When driving, it even follows you down the highway and shows any weather you may encounter ahead.

Dropbox is a favorite app of William Bruce.Dropbox – For me, this app has taken the place of  Microsoft’s My Documents.  The advantage is that all of your files are readily available across all devices including the phone, iPad, laptop and desktop.  Mighty convenient!

TurboScan is a favorite app of William BruceTurboScan – I’ve tried several phone scanning apps and have decided this one is the best.  It’s easy to use and produces excellent scans in either jpeg or PDF format.  It’s great for use in offsite meetings when you’re signing documents and you want to make immediate copies for all the parties.  It’s so handy, in fact, that I use it at my desk even when I have a full-featured scanner nearby.

Kayak travel app is a favorite of William Bruce.Kayak – Fortune Magazine several years ago surveyed business executives asking what travel app they used.  Kayak was the top choice. And I can see why now after using it myself.  It’s a nifty app that collects all of your travel items in one place including airline and hotel reservations, rental cars, event tickets and appointments, etc.  The app then builds your itinerary around these items with reminders.  If you have a change of planes at an airport, it will even tell you when you arrive at the airport what gate your connecting flight is leaving from.  Highly recommended.

KeyRing is a favorite app of William BruceKey Ring – This handy app stores all your loyalty cards: airlines, hotels, stores, restaurants, etc.  Using this app means you never miss out on earning points because you don’t have the physical card with you.  I’ve even scanned my driver’s license and medical insurance cards into this convenient service.

My Favorite iPhone AppsSo let’s get a discussion going.  What apps are you using that you like a lot?  Which ones are the most helpful?

Let me know.  I’m always on the lookout for apps that make life easier.

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William Bruce is an Accredited Business Intermediary (ABI) and Senior Valuation Analyst (SVA) assisting buyers and sellers of privately held businesses in the transfer of ownership.  He currently serves as president of the American Business Brokers Association.  His practice includes consulting services nationally on issues of business valuation and transfer.   He may be reached at (251) 990-5934 or by email at Will@WilliamBruce.org. 

 

 

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Best and Worst Franchises Listed by SBA Loan Defaults

By William Bruce

Best and worst franchisesA franchise can be an excellent investment if — big “if” — you choose the right one.  But how do you determine which are the best and the worst franchises?

To shed some light on the issue, the Small Business Administration has provided us with their list of franchise brands ranked by the percentage of loans in default status.  Many individuals buying franchises use the SBA business acquisition loan program.  So in my office, we think the 10-year loan default rate is a pretty good indicator of whether the franchise is worth considering.

The lists below are for a 10-year period ending September 30, 2018.  Only franchise brands with a minimum of 10 loans are included.

The following top 40 franchises had the lowest SBA loan default rate during this timeframe.  Percentages have been rounded to the nearest whole number.

Franchise SBA 10-Year Loan Default Rate
Comfort Keepers 8%
Christian Brothers Automotive 8%
Home Instead Senior Care 9%
Once Upon A Child 12%
Zeppe’s 12%
Comfort Inn 12%
Buffalo Wild Wings 14%
Plato’s Closet 14%
Merlin’s Muffler 14%
H & R Block 14%
Sports Clips 14%
Culver’s Frozen Custard 15%
Molly Maid 15%
Five Guys Famous Burgers And Fries 15%
Penn Station, Inc. 16%
Cookies By Design 16%
Papa Murphy’s Take & Bake Pizza 17%
Medicap Pharmacy 17%
Great Clips 17%
Jackson Hewitt Tax Service 17%
The Cleaning Authority 17%
Primrose School 18%
Kids R Kids 18%
Wild Birds Unlimited 18%
Signs By Tomorrow 19%
Napa Auto Parts 20%
Massage Envy 20%
Pinch-a-Penny 20%
Jimmy John’s 20%
Subway Sandwich Shop 20%
Hampton Inns 21%
Liberty Tax Service 21%
Taco Bell 21%
Aussie Pet Mobile Villa Park 21%
Little Caesar’s Pizza 22%
Wingstop Restaurant 22%
Servpro 22%
Jani-King 23%
UPS Store 23%
Money Mailer 23%
best and worst franchises

At a whopping default rate of 92%, Noble Roman’s Pizza was the worst franchise on the list.

Using the same yardstick, the worst 40 franchises during the same 10-year timeframe are listed below.  There may be reasons for defaulting on a business acquisition loan other than a lack of financial performance from the franchise; however, we think a high default rate, especially over a 10-year period of time, is at least a red flag to be considered.  Our advice is to be wary of investing in one of these franchises.  If you do want to consider one of them, do your due diligence thoroughly, including talking to many of the current franchisees.

Franchise SBA 10-Year Loan Default Rate
Noble Roman Pizza 92%
Image Sun 80%
24 Seven Vending 79%
Wireless Toyz 74%
Executive Tans 72%
Play N Trade 71%
Country Clutter 71%
Camille’s Sidewalk Café 70%
Pro Golf 67%
Figaro’s Italian Pizza 67%
Buffalo Wings & Rings 67%
Planet Beach 68%
Obee’s Soup Salad Subs 63%
Pita Pit 63%
Amoco 62%
Athlete’s Foot 62%
Mr. Transmission 62%
Beef O’Brady’s 61%
Golf Etc. 61%
Bounceu 61%
Dream Dinners 61%
Atlanta Bread Company 60%
Petland 60%
Salad Works, Inc. 60%
Golf U.S.A. 59%
Nick-n-Willy’s Pizza 57%
Wing Zone 57%
Kwik-Kopy 57%
Philly Connection 57%
Premier Rental Purchase 57%
Econo Lube N Tune 56%
Dollar Discount Stores 56%
Steak Escape 56%
Carvel Ice Cream 55%
Coffee Beanery 54%
Taco Del Mar 54%
Dickey’s Barbeque 54%
Juice It Up 54%
Great Wraps 54%
Wings To Go 53%

Some franchise brands have been ineligible for SBA guaranteed loans from their inception.  This is most commonly because of legal issues created in their franchise documents.  For a list of franchises and the issues which render them ineligible for SBA loans, please see our article by clicking here.

Here are additional articles that might be of interest: What is a Franchise Really Worth (includes valuation formulas for most food service franchises), How to Analyze a Business You’re Considering BuyingHow to Make a Written Offer to Buy a Business and How to Handle the Due Diligence Investigation When Buying a Business.

For our article on a special type of franchising, referred to as master franchising, please click here.

Please don’t hesitate to call or email me if my office can be of assistance.

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William Bruce is an Accredited Business Intermediary (ABI) and Senior Valuation Analyst (SVA) assisting buyers and sellers of privately held businesses in the transfer of ownership.  His practice includes advisory services nationally on issues of business valuation and transfer.  He currently serves as president of the American Business Brokers Association.  He may be reached at (251) 990-5934 or by email at Will@WilliamBruce.org.

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Buying or Selling a Business? You Must Know the Differences in an Asset Versus a Stock Sale.

The differences explained between corporate stock versus an asset sale when buying or selling a business.

The differences between the two methods of buying or selling a business can be critical.

By William Bruce

Are you confused about the differences between an asset sale and a stock sale when buying or selling a business?

My business brokerage firm is often asked about the differences.  The differences between a stock and asset sale can be critical in the sale of small to medium-size privately-held businesses

First, let’s define each.  In an asset sale or acquisition, selected assets are bought from the selling entity by the buying entity.  Those “selected assets” usually include all of the operating assets of the business plus the intangibles (trade name, goodwill, etc.).  Cash on hand and accounts receivable are customarily retained by the seller in an asset sale.  No liabilities of the selling entity are assumed unless specifically agreed upon by both parties.

A corporate stock sale is just the opposite.  The buyer purchases the outstanding shares of stock in the corporation held by the seller.  The purchaser thereby assumes, through the stock acquisition, all of the assets and liabilities (known and unknown) of the company.

The same concept applies to a Limited Liability Company (LLC).  Instead of shares of stock, the buyer purchases the seller’s membership in the LLC and thereby assumes the assets and liabilities of the company.  In this article, when referring to corporate stock transactions, the same considerations apply to LLC membership transfers.

What are the advantages and disadvantages of each?

The critical advantage of an asset sale to the buyer of the business is that none of the UNKNOWN liabilities are assumed.  The potential of unknown liabilities is the real problem.

I remember from my law school days, the typical textbook example is a slip and fall accident in a business. The owner of the businesses is unaware of the incident when he/she sells the company.  A couple of years after the sale of the business, the accident victim files suit for damages.  In a corporate stock sale, the new owner of the business is on the hook for that accident.  Not so in an asset purchase.

It’s this kind of potential exposure that causes most lawyers for business buyers to strongly – very strongly – advise against a corporate stock purchase when acquiring a small to medium size privately held business.

Another advantage to the business buyer in an asset versus a corporate stock purchase is that the new owner of the business gets to set up the individual assets on a new depreciation schedule and start depreciating the assets all over again.  This provides a significant tax deduction for several years.

In the acquisition of the corporate stock of a privately held business, the buyer assumes the existing corporate depreciation schedule in which, most likely, the assets have been fully depreciated, providing little to no tax shelter in the coming years.

On the other side of the table, an advantage to the seller in a corporate stock sale is that most of the proceeds of the sale are taxed at the lower capital gains rate.

However, 90-plus percent of the small to medium-size privately held business ownership transfers that my firm has been involved in have been asset sales, primarily due to the liability exposure issue.  I remember one instance when we nearly had to peel a lawyer off the ceiling when his client thought he might want to buy a business in a corporate stock acquisition!

As a practical matter, about the only time we get involved in a corporate stock sale is when the corporation holds licenses that are not transferrable. Durable medical equipment dealerships are an example with their licenses and contracts from Medicare, Medicaid and BlueCross-BlueShield.

Should you have any questions about this or other issues involved in business ownership transfers, don’t hesitate to call or email.  Please be aware that I’m neither an attorney nor an accountant, but hey, I did spend the night in a Holiday Inn Express last week!

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William Bruce is an Accredited Business Intermediary (ABI) and Senior Valuation Analyst (SVA) assisting buyers and sellers of privately held businesses in the transfer of ownership.  His practice includes advisory services nationally on issues of business valuation and transfer.  He currently serves as president of the American Business Brokers Association.  He may be reached at (251) 990-5934 or by email at Will@WilliamBruce.org.
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How to Conduct Due Diligence When Buying a Business

By William Bruce

How important is due diligence when buying a business?  It’s the most important step in the process.

Due diligence is a fancy term.  In How to conduct due diligence when buying a business.practical use, it can be summarized as that phase in the purchase of a business when (1) you verify the accuracy of the information that you’ve previously been furnished and (2) you make sure that there are no serious, undisclosed problems with the business.

In this step, you will inspect the books and records of the company to verify the financial information.  You will also check whatever appropriate sources are necessary to make sure there are no undisclosed problems lurking around the corner that would adversely affect the business.

We’re assuming that you have made a written contingent offer to buy the business and that you and the seller have agreed on price and terms, possibly after some back and forth negotiations.  Now the transaction is contingent upon your due diligence investigation.

The “Books and Records”

After the seller has accepted your contingent offer, you are entitled to all the books and records of the business.  Since you’re this far along in the transaction, you most likely already have the profit and loss statements and the tax returns.  At this point, you can ask the seller any questions you want about information contained in any of these records.  In fact, you will probably need his assistance in interpreting some of these financial reports.  Don’t be shy.  Ask for any clarification you need.

You may also want to look at other documents such as the bank statements to verify deposits, the monthly sales tax reports if there is a question about sales revenue or the seasonality of sales during different times of the year.  Also the quarterly payroll reports should be available for your inspection if there is any question about wages.

Again, this is the time for you to satisfy yourself as to the accuracy of the information you were previously given and upon which you based your contingent offer to purchase the business.

The Other Issues

The other points to be covered during due diligence involve questions about key employees and the legal, regulatory, and environmental issues plus the lease if the business is in a leased location.  Checklists for each of these areas of inquiry are readily available online.  Just be aware that this is not General Motors buying Ford.  Those kinds of checklists will fill a library!

Remember, in an asset sale, you are buying selected assets of the business and assuming none of the liabilities.  (In a corporate stock sale or LLC membership sale, all issues would definitely remain for the new owner.)  However, even in an asset sale, there are some issues that might legally follow the assets, so you need to be aware of any problems that might exist, and make sure they are handled to your satisfaction.  For example, unpaid payroll taxes follow the assets regardless of the type of sale.

Now if everything checks out all right – and in the majority of cases it does – then you are almost to the finish line.  As the astronauts say near the end of the countdown to blastoff, “We’re good to go.”

If I can answer any questions or assist in any issues involved in buying or selling a business, please don’t hesitate to contact me at (251) 990-5934 or Will@WilliamBruce.org.   To subscribe to this blog, please see the top right portion of this page for the place to insert your email address.  (Don’t worry, we will not sell or use your email address for any other purpose!)

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William Bruce is an Accredited Business Intermediary (ABI) and Senior Valuation Analyst (SVA) assisting buyers and sellers of privately held businesses in the transfer of ownership.  He currently serves as president of the American Business Brokers Association.  His practice includes consulting services nationally on issues of business valuation and transfer.   He may be reached at (251) 990-5934 or by email at Will@WilliamBruce.org. 

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Buying or Selling a Business? Use These 7 Negotiating Tips.

When buying or selling a business, using these 7 negotiating tips will lead to a less stressful experience and a more successful outcome.

In previous articles, we’ve discussed the steps involved in buying a business including how to analyze a business and making the written offer.  Once the initial written offer has been made, the transaction usually enters the negotiation phase.

The negotiation phase is really not complicated.  Most likely you’ve already bought a car and/or a home.  The negotiations over the price of a business are similar.

The initial offer is usually lower than you actually think you’ll wind up buying or selling the business for.

More than likely, there will be a counter offer to the original offer.  You can then accept this figure or continue the ping-pong match with additional counter offers until a number is reached that is acceptable to both parties.

From years in the arena, this is what I have learned about successful negotiations:

1.  The services of a business broker as an intermediary in this phase can be valuable.  If the buyer and seller negotiate face-to-face, chances are high that ill feelings will be aroused.  Even some innocent comment by one of the parties is oftentimes taken the wrong way and the whole transaction blows up.  It’s an extremely sensitive phase of the process.  (But hey, I’m prejudiced.  I’m a business broker!)

2.  If you are a cash buyer, you’re in a stronger position to bargain on price.  If you’re asking the seller to finance a significant portion of the purchase price, you still have some room to negotiate but maybe not quite as much.

3.  If it is not a distress sale, don’t expect to buy the business at a distress sale price.  If it is a distress sale, the business is worth the depreciated value of the furniture, fixtures, equipment and inventory.

4.  If you’re going through a business broker, use him/her.  He’s been involved in similar negotiations dozens of times before.  At each step of the negotiations, ask him for his thoughts.  You don’t have to take his advice, but asking for his input could be advantageous.

5.  Respect the other party.  After all, you’re going to be working together and need to be on good terms during the training and transition phase after closing the transaction.  Don’t make ridiculous demands (e.g.: “This offer is good for one hour only, take it or leave it.”)

6.  Don’t be “penny wise and pound foolish.”  (Is that the right cliché?)  Well anyway, you know what I mean.   Don’t “lose the kingdom for want of a.…  (Now I’m in trouble.  I’ve forgotten the rest of that one!)  I think you get the point.  Don’t lose a good business haggling over a few bucks.

7.  Relax as much as possible and always stay professional.  Never lose your cool.  By now, you’re getting pretty close to landing your own business!

Once you have come to an agreement on price and terms, move on to the next phase with all deliberate speed.  The next phase is the due diligence investigation and is covered in my next post.

For further reading, here are additional related articles:

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William Bruce is an Accredited Business Intermediary (ABI) and Senior Valuation Analyst (SVA) assisting buyers and sellers of privately held businesses in the transfer of ownership.  He currently serves as president of the American Business Brokers Association.  His practice includes consulting services nationally on issues of business valuation and transfer.   He may be reached at (251) 990-5934 or by email at Will@WilliamBruce.org. 

 
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Buying a Business? Here’s How to Write a CONTINGENT Offer.

Let’s say you have looked at several businesses for sale and narrowed it down to the one that you want to pursue.  You think you might want to write an offer to buy this business, but you’re not quite sure.  You have a little anxiety about the unknowns. In such a situation, writing a  CONTINGENT offer to buy the business is the answer.

The Problem

How to write a contingent offer to buy a business.

When making an offer to buy a business, be sure to make it contingent upon the due diligence investigation.

The problem, bluntly stated, is that the seller of the business does not want every Tom, Dick and Harry going through his private books and records, some of which might be very sensitive for one reason or another.

Let me ask you at this point to stand in the seller’s shoes for a moment.  He has taken the big step of putting his business up for sale.  This may have been a tough emotional decision for him.  And he probably has the same heightened level of anxiety as you do about the future transaction.

Now his business is up for sale and before long, he’s got all sorts of strangers asking him to let them look through his most private records.

As a business broker, I can verify that this is a real problem.  Some people who look at businesses have no real intention of ever buying one.  They are what we call “tire kickers.”  They will look forever and never make a purchase.  Others may have a real interest, but when push comes to shove, they lack the financial capacity to make the purchase.  Still, others may have the financial capacity but are unwilling to pay the owner anywhere near an acceptable price for his business.  There have also been instances in which a competitor sent in a stranger to check out the business.  And all of these people will demand to paw through the seller’s private books and records.

Now you may step back into your own shoes.  The brief visit to the seller’s side of the desk, I hope, gives you an understanding of the problem.

The Solution

The safe solution is to write a contingent offer to buy the business.

Simply stated, it works like this.  You, as the prospective buyer of the business, assume for the moment that the preliminary information furnished to you on the business is accurate.  You should by now have at least the annual revenue and cash flow of the business plus the other important numbers.

You then base the amount of your offer to purchase the business on those numbers, but with the following verbiage written into the contract as a condition of the offer:

This offer to purchase said business is fully contingent upon the buyer’s inspection of all the books and records of the business and the buyer’s satisfaction with the information contained therein.

This verbiage in the contract fully protects you.  If you find, during your inspection of all the books and records, including the tax returns, that the numbers furnished you were not correct, then you have the perfect right to terminate the contract and walk away with no further responsibility.  Any earnest money deposit held in trust is promptly refunded.

This procedure also protects the seller, as he knows that you are now serious about the transaction.  You and the seller have come to an agreement on price and terms – possibly after some counter offers – and you have put up an earnest money deposit.  The seller should now regard you seriously, and accordingly will open up all of his books and records for you to inspect.  This inspection phase of the transaction, by the way, is referred to as due diligence and is covered in this article.

The contingent offer to buy the business is actually a win-win situation for both parties.  It assures the seller that the buyer is serious and it protects the buyer in case the information that has been furnished is not accurate.

The Other Contingencies

There are other contingencies that you also might want to include in the contract.  For example, if you are borrowing the money with which to purchase the business, you would need to include the following language to protect yourself if you don’t already have the loan approved:

This offer is fully contingent upon the buyer obtaining satisfactory financing for the purchase of the business.

And if the business operates from leased premises, you would want to include the following proviso:

This offer is fully contingent upon the buyer’s assumption of the existing lease for the business premises or otherwise negotiating an acceptable lease with the landlord for said premises.

Other items that should be included in the purchase contract

  • The Closing Date and Place. Pick a closing date that will give you enough time to inspect the books and records of the business, get your loan approved and take care of any other issues.
  • Inventory Level. If the business carries inventory for resale, this is where you agree on the amount of inventory that must be on hand on the date of closing.  This should be the amount of inventory normally carried by the business in the normal course of doing business.  Your broker should have this figure.  The purpose of this provision is to prevent an unscrupulous seller, between the date of the agreement and the date of closing, from selling out the inventory and leaving the buyer with empty shelves.  You and the seller jointly take inventory on the day of closing.  If the inventory level, at cost, is below the figure specified in this paragraph, the purchase price of the business goes down by the amount of the shortage.  Conversely, if the inventory is over the specified level, the price of the business is adjusted upward by the amount of the surplus.  This is fair to both parties, and if the inventory discrepancy is small, the difference is usually waived, as both parties understand that it is impossible to quote an exact inventory figure in advance for any given day.  But the provision is there for protection if it needs to be invoked.
  • Training. You and the seller need to agree on the number of days training you think you will need from the seller.  Normally, this ranges anywhere from one to two months.
  • Non-Compete Agreement. You don’t want to buy Ms. Jones’s gift shop and then next month see Ms. Jones open a competing shop right down the block.  This provision prevents that possibility.  You simply agree on the distance and time limitation in this paragraph of the contract.
  • Removal of Contingencies. Remember all of the discussion above of the contingencies: inspection of the books, the lease and loan approval.  At some point, these contingencies are satisfied or waived by the buyer.  This part of the contract is where you decide how much time you’re going to need to accomplish any work needed to satisfy yourself as to these contingencies. Ten to 15 days prior to the closing date is customary.  After satisfaction of the contingencies, the contract then becomes binding on both parties, and the closing documents can be prepared.
  • Offer Deadline. This provision gives the seller a deadline for response (acceptance or counter-offer) to your offer.  If there is no response from the seller by this date and time, your offer is legally null and void and you have no further liability.  Two or three days are long enough here, unless there are unusual circumstances.

Readers can request by email a copy of William Bruce’s 67-page booklet, “How to Buy a Business in a Safe and Organized Way.”  The booklet contains a sample of an Offer to Purchase Agreement.  The email address is Will@WilliamBruce.org.

Now, take a deep breath.  It’s really not as complicated as most folks seem to think.  And we’re just getting to the fun part – the negotiations, which is covered in a separate article.

Please don’t hesitate to call or email me if my office can be of assistance.

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William Bruce is an Accredited Business Intermediary (ABI) and Senior Valuation Analyst (SVA) assisting buyers and sellers of privately held businesses in the transfer of ownership.  He currently serves as president of the American Business Brokers Association.  His practice includes consulting services nationally on issues of business valuation and transfer.   He may be reached at (251) 990-5934 or by email at Will@WilliamBruce.org

His booklet “How to Buy a Business in a Safe and Organized Way” contains a sample Offer to Purchase Agreement.  You can obtain a complimentary copy by contacting William Bruce.

(C) Copyright William Bruce.  All rights reserved.

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