SBA Financing rules change

The Small Business Administration has long been the primary lender for people buying an existing business. And as a government agency it is subject to changing rules and policies. Sometimes the changes are difficult to understand but in the case of the new SBA lending rules I think they are excellent changes that will benefit many business buyers and sellers.

The primary change is requiring an independent assessment of a businesses value. For all loans over $350,000 an independent valuation must be made before the lender will approve the loan. This should help buyers feel more confident that the business is worth what they are paying.
For sellers this means they need to have reasonable selling prices or the seller will need to be the lender willing to finance the buyer.

There are several other changes that are more mechanical than substantive but all of the changes improve the SBA lending program for buyers, sellers and most importantly, the taxpayers.

Why do some businesses sell and some just close?

Operating a business for the benefit of the business owner - today..... is different than operating a business that is building value and will one day be sold for a nice profit.

Do you want to be able to sell your business when you no longer want to own it?

Here's what you need to start doing NOW!!

1. Keep your books accurately. A buyer will pay you a multiple of the earnings you can PROVE. You will not be paid for earnings that you can't prove.
2. Make sure your employees are paid in accordance with all federal and local laws.
3. Get rid of any lawsuits that may be haunting you.
4. Make certain your insurance policies are up to date.
5. Make sure your business name is properly registered and protected with local agencies.
6. Pull a Security interest report and get rid of any old UCC-1 filings (remember the copier you leased, then bought, 5 years ago? The UCC-1 was probably never released by the secured party (a UCC-3 form will release the lien).
7. Limit the number of family members working in the business.
8. Fully document, in writing, all important systems and processes in the business. This is difficult and time consuming but will help you get a much higher price when you sell the business.
9. Get rid of unused assets - excess inventory, old equipment, etc.
10. Most importantly - You may not know when you'll need to sell the business so do the above NOW, so you can respond to any opportunities that might come your way.

The best advice..."Run your business like it's always for sale, because it is."

Dan

Small business earnings definitions

When looking to purchase a business you will see all kinds of terms, many of which don't make any sense. Here's a list of common terms and a rough idea of what they mean:

Cash Flow - this is the worst definition used. It's an attempt to convey how much money is available to a business owner after all the expenses of the business are deducted from the revenue. Unfortunately Cash Flow technically also would include any increase or decrease in working capital items like inventory, accounts receivables, etc.

Seller's Discretionary Earnings (SDE) - This is calculated same as above but would include expense items added back that are not important to the business operations. Usually these add back items are owners "perks".... country clubs, entertainment, etc.

EBITDA - This is ..(E) earnings (B) before (I) interest (T) taxes (D) depreciation (A) amortization. The I&T will be different for the buyer than the seller so they are added back and a buyer will need to account for there I&T costs based on their debt structure. D&A are added back because they are non-cash expense. Meaning you don't write a check to pay for D&A like you do for payroll or utilities, therefore the deduction in the expenses is not real dollars but actually a tax deduction. Unfortunately (or fortunately) this does not adjust for a fair managers salary. Most business book the owners salary as "what's left" after all expenses and this number can swing wildly from year-to-year.

EBITDA+OC - This is the best definition but the least used. It's EBITDA as described above PLUS the owner's compensation. This is the real comparison number that should be analyzed when investigating the profitability of a business.

How Profitable Can a Small Business Be?

I'm often asked this question.

For some reason many people believe a business has to be really big to make a great income for the owner, it doesn't.

Here is a sample of many types of business we see everyday.

Hours - 5 days a week 8am - 5pm

Sales per day $2,000 (that's $222/hour)

Annual Sales $500,000

Income to business owner $100,000!!

That's $200/hour = $100,000 per year!

Your business doesn't need to be big to be successful, it just needs to be good.

What makes a small business VALUABLE!!!

Two things make a small business valuable:

1. The amount of sustainable and growing profit it generates
2. The ability for a potential buyer to see #1

Too many small business owners manage their business to "avoid" taxes when in fact what they are doing is avoiding "profits". If General Electric kept it's books like a many, many small businesses every manager in GE would likely be facing jail time!

Value in the eyes of the buyer?

• Can the real profit of the business be clearily and easily identified?
• Is there reason to believe the businesses profits can be repeated or improved upon in the future?

Simple questions but difficult for many business buyers to answer......because too many business owners "hide" profits in an effort to avoid taxes.

It's amazing to me, a business owner will pay his kids college out of the business and treat it as an expense (likely illegal but therefore avoid taxes on that amount) but then the biz owner doesn't fund his/her TAX DEDUCTBLE retirement plan which is totally legal!! Dumb.

Guess what, if you want to sell your business one day you will need at least 3 years of clean books to get the highest price for the business....that's three years!! And that doesn't mean go back 3 years and try to un-scramble your books, it means 3 years of clean books.

WARNING - most small business owners don't know when their business is going to NEED to be sold. Heart attacks don't give 3 year notices, in all likelihood neither do divorces, partnership break ups or all the other things that move a business owner to sell their businesses.

Want to have a better business that will pay you more now (yes, even after taxes) and get you the highest price when you sell?

Get a good accountant (no I am not an accountant), keep your books properly, take advantage of all the LEGAL tax breaks avaialble.

Make more money while you own the business, make more money when you sell the business and be a good corporate citizen along the way. What's not to like?