Carnival Cruise Lines Returns to Mobile, Alabama. A Word of Caution is in Order.

cruise-ship-terminal-mobile-al

Mobile, Alabama Cruise Ship Terminal

Carnival Cruise Lines is returning to Mobile, Alabama today.  We’re excited about the return of a cruise ship to the historic and beautiful Azalea City, home of America’s first Mardi Gras celebration.  (Hey, I’ll bet you thought Mardi Gras started in New Orleans?)

But in the midst of this enthusiasm, a word of caution is in order.

Mobile’s recent history with Carnival has not been financially beneficial. Five years ago Carnival Cruise Lines shafted the City of Mobile for $20 million.  After enticing the city to spend over $20 million for a cruise ship terminal facility, Carnival pulled its ship out of Mobile after a short tenure.  Carnival abruptly left town without even the good manners of a courtesy notice to city leaders.

It was a “Wham bam, thank you ma’am” without the “thank you.”

Carnival Corporation and  PLC (its sister corporation) comprise eleven individual cruise line brands, operating a combined fleet of 96 ships.  Brands include Carnival, Cunard, Holland America, Princess, Seabourn and four others.

Carnival Corporation was initially formed in 1972.  After achieving its position as one of the world’s most popular cruise lines, the company made an initial public offering of 20% of its common stock in 1987. This provided an influx of capital that allowed the company to begin its expansion through acquisitions. In 1989 its first acquisition was the premium operator Holland America Line.  Others quickly followed.

The CEO and owner of controlling interest in Carnival is Micky Arison, son of the founder.  Arison was born in Israel of Romanian ancestry and now lives in Miami as an American citizen.  Forbes lists him as one of the world’s wealthiest individuals.

In 1988, Carnival Cruise Lines expanded into airlines with the purchase of Pacific Interstate Airlines, which was subsequently renamed Carnival Air Lines.  This venture ended ten years later in bankruptcy court with creditors holding the bag.

Micky Arison’s companies are not ideal corporate citizens.

Arison also owns the professional basketball team, Miami Heat.  Miami area governments built Arison a $250 million dollar waterfront stadium several years ago in exchange for a rental agreement.  At 10 years into the rental contract, thanks to “creative” accounting by Arison, Miami had received no rent for the stadium, according to a columnist for the Miami New Times.

Sound familiar?

Please Mobile, Alabama leaders, keep your eyes wide open.  Don’t give away the keys to the city this time in exchange for a potentially worthless promise from Arison.

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William Bruce works in business mergers and acquisitions.  He is an Accredited Business Intermediary and 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.

Posted in Gulf Coast Regional & National Economy, Mobile, Fairhope & Gulf Shores, Alabama | Tagged , | 3 Comments

Business Buyer-Seller Confidence Index Is Strong for Sale of Small to Medium Size Companies

by William Bruce, President                                                                                                                   American Business Brokers Association
business-for-sale

BizBuySell.com, the Internet’s largest business-for-sale marketplace, recently announced the results of its annual Business Buyer-Seller Confidence Index, an indicator of small business buyer and seller sentiment on the current business-for-sale environment. The confidence index is calculated by evaluating survey responses of more than 1,500 people interested in either buying or selling a small business.

A separate score is calculated for both current small business owners interested in selling and prospective buyers currently exploring the market. Each group’s score ranges from 0 to 100, with 100 representing a perfect environment for buying or selling a business.

This year’s results showed sellers feeling more confident that they can successfully exit their businesses as the Seller Confidence Score grew to 62 after two consecutive years at 56. Not only did a majority of owners (58 percent) believe they can receive more money for their businesses than they could last year, but more than 90 percent were optimistic enough to say they will be able to achieve the same or higher sale price next year. Respondents to both questions responded with higher, more optimistic percentages than did the same last year. Overall, this is a good indication that sellers have seen conditions improve since the recession and are confident that favorable conditions will continue in 2016.

Sellers also indicated an increased number of buyers in the market this year. When asked to identify the biggest issues limiting their ability to sell, just 12 percent said they couldn’t find a buyer – a significant drop from the 27 percent who indicated a shortage of buyers in 2014. Perhaps even more importantly, 43 percent of sellers said they have no issues and could successfully exit their businesses right now compared to just 23 percent who felt the same level of confidence last year.

“Small business owners are definitely viewing today’s market as a great opportunity to sell,” said Bob House, Group GM of BizBuySell.com and BizQuest.com. “We’re also seeing this increased confidence translating into more owners actually listing their small business on the market. The number of for-sale businesses on BizBuySell.com reached a six-year high this year, driven by increasing small business financial performance in the post recession period.”

My own business sales, mergers and acquisitions practice based here on America’s Gulf Coast reflects this national trend.  We’re busier in my office now than we’ve been since early 2007.

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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.  His business brokerage website may be viewed at www.WilliamBruce.net.

 

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Banks Rated Strongest to Weakest in Mobile and Baldwin Counties, Alabama

Wells FargoIt’s been a year since we reviewed the local banking scene, so we offer this update.

Banks are often placed on a pedestal in the public mind, but they are like any other category of business in that some are stronger and better managed than others.

One publicly available bank rating service is Bankrate.com.  This system employs more than 20 tests to measure the capital adequacy, asset quality, profitability and liquidity of each rated bank. Individual performance levels are determined from publicly available regulatory filings and are compared to asset-size peer norms, industry standards and key benchmarks. Combined results form the basis for the star ratings.

Bankrate.com assigns a 1-to-5 star ranking with five stars representing the highest rating. Institutions with satisfactory performance will generally receive a rating of three or more stars with the majority of banks falling into the three to four-star range.  Ratings are believed to be reliable but the information is not guaranteed.

In addition, events since the information was collected may have altered an institution’s financial condition.  The current ratings are based on the banks’ financial statement as of December 31, 2015.

Since our last report two banks with local branches have improved their rankings.  Community Bank and The First Bank, both based in Mississippi, have both moved up from from three stars to a four stars ranking.  But two banks lost a star. Woodforest National Bank, found in some Wal-Mart stores, dropped from five to four stars.  And First Community Bank moved down a notch to three stars.

One new bank that has entered the market since our last report is Birmingham-based Oakworth Capital Bank with a branch in downtown Mobile.  Alabama Attorney General Luther Strange is a founder of the bank and serves as a director.  The bank is top rated at five stars.

The following results for Mobile and Baldwin Counties, Alabama, are based on the banks’ financial statements as of December 31, 2015 as ranked by BankRate.com.

5 Stars (superior, top rated):

  • Bank of the Ozarks
  • Oakworth Capital Bank
  • ServisFirst Bank
  • Wells Fargo Bank

4 Stars (sound, indicative of a sound financial condition):

  • Bancorp South
  • BB&T
  • BBVA Compass
  • Bryant Bank
  • Centennial Bank
  • Century Bank
  • Citizens Bank
  • Coastal Bank & Trust  (the trade name used by Synovus Bank in Alabama)
  • Community Bank
  • First Bank
  • Hancock Bank  (the trade name used by Whitney Bank in Alabama)
  • Iberia Bank
  • National Bank of Commerce
  • PNC Bank
  • RBC Bank
  • Regions Bank
  • Southpoint Bank
  • State Bank & Trust
  • TrustMark
  • United Bank
  • Woodforest National Bank

3 Stars (performing, indicative of a generally satisfactory financial condition):

  • First Community Bank
  • Merchants Bank

2 Stars (below peer group, indicative of a below average financial condition):

  • No banks in the local market were rated 2 stars

1 Star (lowest rated)

  • Commonwealth National Bank

Again this year Commonwealth National Bank is the only local bank with the lowest ranking.  The bank is headquartered at 2214 St. Stephens Road in Mobile.  In the composite summary of the bank, the rating service said, “Bankrate believes that, as of December 31, 2015, this bank exhibited a significantly below average condition, characterized by substantially lower than normal overall, sustainable profitability, very questionable asset quality, below standard capitalization and near normal liquidity.”

The “very questionable asset quality” noted by Bankrate refers primarily, it is assumed, to Commonwealth’s loans receivable and most probably represents a significant problem for any stronger banks considering a rescue by acquisition of the troubled bank.

In summary, please keep in mind that these ratings are based on information furnished by the banks as of December 31, 3015.  Things could have changed since then.  And there are other bank rating services whose rankings may differ.

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William Bruce has served as a bank director.  He is a business broker, an Accredited Business Intermediary and business appraiser.  He consults nationally on issues involved in business transfers and valuation.  He may be reached at Will@WilliamBruce.org  or (251) 990-5934.  He currently serves as president of the American Business Brokers Association.
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How to Use the SBA 7(a) Loan Program to Buy a Business

SBA 7(a) loans explained

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 will come by your office soliciting your business.

Now this is a true and humorous story.  One of my clients who had been turned down by a local bank for a business acquisition loan, had the same banker visit him two years later soliciting his account after he had used other means to buy the business.  The business owner assumed a serious air and in a somber tone, replied, “Well now Mr. Banker, we’ll be happy to consider your application for our business. Let’s see, we’ll need your financial statement and a list of references and your business plan for five years into the future. Once we have your completed application, I’ll be glad to take it before my committee and let you know of our decision.”

The banker was taken aback.

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 7(a) 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.

The maximum amount that can be loaned under the program is $5 million. The average loan in fiscal year 2015 was $371,628.  Interest on the loans is negotiable with the SBA setting the maximum rate that a bank can charge.  As this is being written, the maximum rate for loans over $50,000 is 6.25 percent.

The down payment required is usually 20 percent of the price of the business being acquired.  Some lenders will allow a portion of this 20 percent 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; however, 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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The 3 Financial Benchmarks All Business Owners Should Monitor.

Updated February 14, 2017.

Financial ratios

Many small to medium size business owners, including this author, get wrapped up in day to day management of their businesses to the exclusion of some important aspects of oversight.

The ultimate business benchmark is, or course, bottom line net profit.  However, the three financial ratios discussed here don’t take long to calculate and will keep you on track for a healthy bottom line number.  These are the three that should be checked frequently to monitor the ongoing health and viability of your business:

Gross Profit Margin

Gross profit is simply your total sales (less sales tax) minus the cost of products sold.  Other expenses like rent, payroll, etc. are not considered in this calculation.  The gross profit margin is usually expressed as a percentage by dividing the gross profit by total sales.

For example, if your gross sales for last year (exclusive of sales tax) were $500,000 and the cost of the products you sold was $220,000, then your gross profit was $280,000.  Dividing your gross profit by total sales, we can calculate that your gross profit margin was 56 percent.  The rest of your expenses come out of this gross profit to compute your net profit.

Most industries have benchmarks for gross profit margin.  If yours is above your peer group, you’re doing a good job.  If lower, look for ways to improve.

Current Asset Ratio

This ratio is a measure of your company’s ability to pay its bills as they become due.  It is calculated by dividing your company’s current assets by its current liabilities.

Current assets are cash in the bank, accounts receivables and any other assets you expect to be converted into cash within the next 12 months.  Current liabilities are those obligations that will become due and payable during the next 12 months.

A ratio of two or better is considered by most analysts to be a comfortable situation.  If it’s one or lower, you’ll be waking up in the middle of the night!

Inventory Turn

This calculation measures how fast you’re selling and replacing your inventory.  Inventory turn is particularly important in retail and wholesale operations, but has application in all business categories.  It’s calculated by dividing the average inventory for the time frame being analyzed by the cost of goods sold.

Again, consult your industry benchmark for what is average in your niche.  The higher the turn, the better job you’re doing in managing your inventory level.  A low number most likely means you’re carrying too much inventory for your level of sales.

In summary, don’t be intimidated by the idea of periodically calculating these benchmarks.  It’s pretty easy.  And if you need help, ask your accountant.

Here are related articles you might find interesting.

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William Bruce is a business broker, an Accredited Business Intermediary and a business appraiser.  His practice includes consultations nationally on matters involving business valuations and transfers.  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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Banks Ranked Strongest to Weakest in Mobile and Baldwin Counties, Alabama

 

This article has been updated and can now be found at https://williambruce.org/2016/08/15/banks-rated-strongest-to-weakest-in-mobile-and-baldwin-counties-alabama/.

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William Bruce has served as a bank director.  He is a business broker, an Accredited Business Intermediary and business appraiser.  He consults nationally on issues involved in business transfers and valuation.  He may be reached at Will@WilliamBruce.org  or (251) 990-5934.  He currently serves as president of the American Business Brokers Association.

 

Posted in Alabama's Economy, Gulf Coast Regional & National Economy, Mobile, Fairhope & Gulf Shores, Alabama | Tagged , , , , , , , , , , , , , , , , , , , , , , , , , , , , | Leave a comment

The Best and Worst Franchises to Buy

Brightway Insrance is Forbes Magazine top pick for franchises costing less than $150,000.

Brightway Insrance is Forbes Magazine top pick for franchises costing less than $150,000.

As a business broker and appraiser, I’m often asked about franchises, which is why I noticed the following article.

Forbes Magazine writer Emily Inverso has just penned an interesting list of the best and worst franchises to buy.  Her rankings are based on data gathered over a five year time frame from 2009 through 2013.  Inverso’s article can be reviewed here.

The franchise offerings are ranked on several metrics including entry cost, 5-year growth rate and 5-year franchise continuity.  Franchise continuity as shown in the rankings is the percentage of franchises opened that are still in business at the end of the five year period.

The franchises are divided into three categories according to entry cost: up to $150,000, $150,000 to $500,000 and over $500,000.

The top ten in Forbes’ ranking for the under $150,000 entry cost were:

  • Brightway Insurance – sells personal and business insurance policies.
  • Maid Pro – provides residential cleaning service.
  • Right at Home – home care to seniors and disabled.
  • Discovery Map – curates quirky maps and travel guides.
  • Just Between Friends – provides consignment events for children’s and maternity clothes.
  • Seniors Helping Seniors – non-medical home care by seniors
  • BrightStar Care – homecare
  • Pop-A-Lock – locksmith services
  • Mathnasium – math tutoring
  • Weed Man – lawn care

As ranked by Forbes, the worst 10 franchises in the under $150,000 investment category were:

  • American Express Travel Services – 57% continuity for 5-year period
  • Gardsman Furniture Professionals – 47 % continuity
  • ERA Real Estate – 48% continuity
  • All Tune and Lube – 31% continuity
  • United Country – 52% continuity
  • WSI – 43% continuity
  • Handyman Connection – 31% continuity
  • Curves – 37% continuity
  • Computer Trouble Shooters – 42% continuity
  • Realty World – 29% continuity

In the mid sized investment range of $150,000 to $500,000, these were Forbes’ top 10 ranking franchises:

  • Jimmy Johns – fast food
  • Jet’s Pizza – deep dish pizza in a square pan
  • Marco’s Pizza – “authentic Italian” pizza
  • Plato’s Closet – young adult clothing
  • Dutch Bros. – drive-thru coffee shops
  • Wingstop – wings restaurants
  • Sports Clips – sports themed barber shops
  • Batteries Plus Bulbs – replacement batteries
  • Anytime Fitness – 24 hour gyms
  • Auntie Ann’s – pretzels in mall food courts

In the same size category ($150,000 to $500,00) these were Forbes worst 10 franchises to buy:

  • It’s a Grind Coffeehouse – 36 locations
  • Econo Lube N’ Brakes – 33 locations
  • Mr. Payroll – 88 locations
  • Cottman Transmissions – 67 locations
  • Chock Full o’ Nuts – 31 locations
  • Quiznos – 1,439 locations
  • Great Steak & Potato Company – 90 locations
  • Epcon Communities – 86 locations
  • Fitness Together – 207 locations
  • The Athlete’s Foot – 54 locations

For details on the above franchises and to review the ranking of franchises requiring an investment of greater than $500,000, please visit the Forbes article here.

For additional article by William Bruce on franchise risks and opportunities, please see:

Best & Worst Franchises Listed by SBA Loan Default Rates

List of Franchises Not Qualified for SBA Loans

What is a Franchise Really Worth. How to Value any Franchise.

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William Bruce is an Accredited Business Broker 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 may be reached at (251) 990-5934 or by email at WilliamBruceOnline@gmail.com.  His business brokerage website may be viewed at www.WilliamBruce.net.
 
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