I am often asked when is the "right" time to buy or sell a business. Unfortunately the answer is complicated. When I'm asked that question my response is "as compared to when?".
Below is an example:
Mary wants to buy a business and John thinks he wants to sell his small business.
The Biz: In 2009 John's business struggled like many businesses. He was down about 30% in gross sales and earnings. For 2009 his sales were $600,000 and earnings $100,000. John wants to know if he can get his business back up to earnings of $125,000 can he sell it for more money in 2011 (he'll need full year 2010 results to get credit for any increased earnings).
The buyer: Now there's Mary. Mary has $100,000 for a down payment and she need's $60,000 per year in salary from the business to live on.
Let's quickly figure how much Mary can afford to pay John for his business:
Mary has $100,000 for down payment
Current interest rate used for Mary's loan 9%
Biz earnings today- Mary's salary of $60,000 leaves $40,000 ($100,000 - $60,000) left for debt service.
An SBA lender would, today, loan Mary about $197,000 based on the available $40,000 for debt service.
So Mary can pay John $197,000 + her down payment of $100,000 = $297,000.
What if John's earnings increase to $125,000 but interest rates 18 months from now are 11%
Then the bank would likely loan $237,000, add that to Mary's down payment of $100,000 = Selling price of $337,000.
So even though John's earnings increased 25%, his selling price only goes up about 11% because of the increase cost of financing caused by higher interest rates.
So when the right time, hard to say? If John waits, what happens if his earnings stay at $100,000 but interest rates increase? Then his selling price would drop!
Usually the best time to sell is when earnings are up and interest rates are down, but that doesn't always coincide with the events of the buyers and sellers lives.
Saturday, January 30, 2010
Friday, January 22, 2010
Top 5 things you can do in 2010 to increase the value of your small business
Big improvements often come from small changes. What could you do in 2010 to build the value of your small business?
- Get professional small business accounting advice and follow it! Get your books set up in a way that makes your profit/loss statement a tool to run the business not just a piece of paper.
- Stop trying to avoid taxes the risky (read...illegal way) and start taking advantage of small business tax breaks that are legal. First step, set up a small business retirement plan.
- Decide to learn something new this year. You may have been doing the same thing for 20 years and you THINK it's right...but that doesn't make it right. No matter how good you think your business is... you are probably wrong. Do you have the nerve to find out?
- Hire someone smarter than you this year. Do you have the courage for that?
- Tell your employees thank you when they do a good job. Don't assume they only care about the pay check, they deserve recognition and you have to be the one to deliver it...sincerely.
Monday, January 11, 2010
Guest Post on SBA Lending
Why SBA Loan Production is Down
Sheila Spangler, CBI, Capital Strategies, Boise, ID
There was an article recently on CNNMoney.com that said SBA loan production is down 36 percent from 2008. As business brokers, many of us have felt that pinch first hand, but have you wondered why SBA loans have waned along with the rest of the credit market? After all, don’t those loans have a guarantee? Why won’t the bankers make them? I decided to do a little research.
As a former commercial banker, banking school graduate and business broker, I am a big fan of SBA loans. I’ve originated many in the last 20 years. Without these loans, my main street business clients would not have been able to sell their businesses to new owners or expand. We are suffering through the worst economic crisis since the Great Depression. During the Depression, interest rates were too high and no one could afford to borrow even though there was plenty of liquidity. Today, the problem is different. Rates are low yet liquidity is even lower for banks. Here’s two reasons why banks aren't willing to open the credit spigot:
1) Unhealthy balance sheet. Just because a bank may have paid back TARP, it doesn’t mean the bank is “healthy.” In many cases, problem loans are not being addressed because doing so would cause write-downs, which erode bank capital. The regulators are stepping softly in many cases encouraging bankers to term out loans for longer than normal periods to avoid losses, business closures and panic. But in many cases, the bankers are using a “head in the sand” approach and not addressing problems.
2) Fear of making the wrong decision. Bankers are running scared. The lack of capital and unaddressed time bombs on the balance sheet has made them even more cautious than normal. They are playing a waiting game: waiting for things to get better. But it’s a catch 22. Eventually, someone has to step forward and lead the charge. Of course, just like the eager lieutenant on the battle field, there is always a chance they’ll get shot in the back, too.
You’re probably thinking “Okay, but why don’t banks make SBA loans since they have a government guarantee? Aren’t they completely safe for the banks? What have they got to lose?”
Here are my top four reasons why SBA loan production is down. These reasons are based on experience and conversations with bankers, regulators and debt buyers.
Banks:
In some cases, the business owner may not be able to sell the business at all. So he or she will have to continue to work longer. This is heartbreaking for many business owners. Some have worked years to build their businesses and now see them falter just when its time to retire.
The only thing I can say is this: business owners are the toughest people in the world. Just like everything else in your business life, you’re going to have to find a way to fix this yourself. Perhaps we can form a business owner’s co-op and provide loans to each other to take the banks out of the picture. Now wouldn’t that be something?
Sheila Spangler, CBI, Capital Strategies, Boise, ID
There was an article recently on CNNMoney.com that said SBA loan production is down 36 percent from 2008. As business brokers, many of us have felt that pinch first hand, but have you wondered why SBA loans have waned along with the rest of the credit market? After all, don’t those loans have a guarantee? Why won’t the bankers make them? I decided to do a little research.
As a former commercial banker, banking school graduate and business broker, I am a big fan of SBA loans. I’ve originated many in the last 20 years. Without these loans, my main street business clients would not have been able to sell their businesses to new owners or expand. We are suffering through the worst economic crisis since the Great Depression. During the Depression, interest rates were too high and no one could afford to borrow even though there was plenty of liquidity. Today, the problem is different. Rates are low yet liquidity is even lower for banks. Here’s two reasons why banks aren't willing to open the credit spigot:
1) Unhealthy balance sheet. Just because a bank may have paid back TARP, it doesn’t mean the bank is “healthy.” In many cases, problem loans are not being addressed because doing so would cause write-downs, which erode bank capital. The regulators are stepping softly in many cases encouraging bankers to term out loans for longer than normal periods to avoid losses, business closures and panic. But in many cases, the bankers are using a “head in the sand” approach and not addressing problems.
2) Fear of making the wrong decision. Bankers are running scared. The lack of capital and unaddressed time bombs on the balance sheet has made them even more cautious than normal. They are playing a waiting game: waiting for things to get better. But it’s a catch 22. Eventually, someone has to step forward and lead the charge. Of course, just like the eager lieutenant on the battle field, there is always a chance they’ll get shot in the back, too.
You’re probably thinking “Okay, but why don’t banks make SBA loans since they have a government guarantee? Aren’t they completely safe for the banks? What have they got to lose?”
Here are my top four reasons why SBA loan production is down. These reasons are based on experience and conversations with bankers, regulators and debt buyers.
Banks:
• Laid off their experienced SBA business development officers and underwriters when the market melt down happened last year.It’s going to be awhile before the credit market loosens. In the meantime, buyers and sellers of businesses have to get more creative and flexible. This means sellers will have to self-finance more of the transaction. That’s good for buyers but not so good for sellers that want to exit the business and not worry about it any more.
• Don't want to learn the program because they perceive the return to be low, and for many, what they don’t understand, they fear.
• Know that even if they get the SBA loan done properly, there is really no assurance that the bank will be able to collect on the guarantee to get “paid back” should the business fail. The loan must be properly underwritten and serviced in order to maintain the guarantee for the life of the loan.
• Don’t like unknowns and right now everything is an unknown. Is the seller’s business really able to withstand a transition now? Does the buyer really have the skills to manage and lead? Is there a hidden problem?
In some cases, the business owner may not be able to sell the business at all. So he or she will have to continue to work longer. This is heartbreaking for many business owners. Some have worked years to build their businesses and now see them falter just when its time to retire.
The only thing I can say is this: business owners are the toughest people in the world. Just like everything else in your business life, you’re going to have to find a way to fix this yourself. Perhaps we can form a business owner’s co-op and provide loans to each other to take the banks out of the picture. Now wouldn’t that be something?
Wednesday, January 6, 2010
All Small Business Owners will Leave Their Business - I Guarantee it!
The question is, will you leave your small business the smart way or leave it the dumb way?
Having an exit plan for your business is smart. A formal plan will look at your options, devise efficient tax strategies and create an estate plan that eliminates any disputes that might result if you suddenly passed away.
Here's a good article on what to consider when looking at your Exit Plan . Take a few minutes to consider how a plan can help you, your family and your business.
And I repeat.....you will leave your business one day...100% Guaranteed. If you gotta go, at least go out on your terms.
Having an exit plan for your business is smart. A formal plan will look at your options, devise efficient tax strategies and create an estate plan that eliminates any disputes that might result if you suddenly passed away.
Here's a good article on what to consider when looking at your Exit Plan . Take a few minutes to consider how a plan can help you, your family and your business.
And I repeat.....you will leave your business one day...100% Guaranteed. If you gotta go, at least go out on your terms.
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