Business Solutions

Financing

Financing a purchase of a business is often misunderstood. 80% of privately held companies sell with some form of seller financing. Sellers always want full payment at the close, but it isn't realistic considering only 20% of deals happen that way. And when sellers get full payment at closing, it is usually at a deep discount.

Traditional lenders are often portrayed as the bad guys because they won't lend money without nearly 100% collateralization with non-business and personal assess. They really want their money back whether the business makes it or not. The SBA makes it easier for banks to make loans, but the SBA does not lend money for people to buy businesses. The SBA guarantees loans by lenders allowing banks to loan money to small business that they otherwise wouldn't. I suggest getting a bank involved to finance as much as possible, but remember it will likely come pretty much fully collateralized. This funding source should be combined with seller financing, but you need to come to the table with other sources.

When putting together a deal for the purchase or sale of a business, both buyers and seller need to be realistic. Most deals are not going to qualify for 100% financing or even 80% financing from traditional lenders without collateral. If sellers demand all cash, there business will be difficult to sell. Buyers with money, wont feel comfortable with an owner demanding 100% payment because the buyer has no recourse if representations about the business don't pan out. Buyer and seller should plan to have some mutual interest in the business for some time after the sale that allow both parties to maximize the value of the business. The seller receives more money for the business over time and the buyer has the confidence and recourse should representations not materialize. Often times, consultation by previous owner can remedy many business issues that my crop up in a business in which they have experience. The previous owner is motivated to assist because there is mutual benefit.

Business Sellers

There are many reasons why businesses don’t sell. The 3 QQQ's are among the issues that prevent businesses from selling. The 3 QQQ's are listed below:

1) Quality Revenue may sound obvious to a successful business, but simply posting sales numbers are only the beginning. Sales should demonstrate a potential growth rate and future consistency that new owners can value

2) Quality Earnings are more important than Quality Revenue. Earnings should be honestly and accurately reported showing how the business will produce income for new ownership. If the business can't be shown to make money for new ownership, the business isn't ready for sale. The business should be prepared for sale which includes making the business viable for profit for both the seller and buyer.

3) Quality of Life may not appear on a balance sheet but it should. The business needs to be If quality of life isn't being met, Quality Revenue and Quality Earnings are not sustainable.

Sellers need to accurately and clearly show the 3 QQQ’s to get a sale at the maximum profit. Additionally the value of the business is not limited to an income statement or a balance sheet. How the business is positioned for the future owner beyond traditional accounting metrics can be the difference between a successful transaction and the 90% of businesses that go unsold.

Business Buyers

Buying an existing business is the most effective way to generate profit from an enterprise. The value of a going profitable business is a huge advantage to the new owner. Procedures, best practices and customer lists are already in place. There is also a revenue stream to pay off the debt that was acquired when buying the business.

The Quality of Revenue, Quality of Earnings and Quality of Life are some of the metrics that should be considered when determining the value of the business. But the value of a business is not just the 3 QQQ’s or some multiple of sales or EBITDA. While these are critical metrics it can’t value the human asset a new owner can bring to the balance sheet.

A strong marketer can double the revenue of a business that typically does little or no marketing. Laundromats are a good example of such a business. Some new owners have created explosive revenue growth exceeding 50% by doing simple things like improved customer service and executing simple marketing plans. Buyers should find opportunities where their personal assets add to the balance sheet. Creativity and ingenuity is really the engine of business. If you attempt to do things as they were done in the past, they will likely have less success that what was experienced in the past. That doesn't mean quit sound business practices that continue to work but look for innovations in the future business practices.

Business Turn Arounds

There are times when a business gets stagnant or even gets in trouble. During these times, new energy and fresh ideas can produce better results. Many times it takes relatively little time to develop a plan that can mark the beginning of a turn around. Every business can’t be turned around, but there is always a better outcome that can be achieved by accurate analysis and proper execution.

In the most serious cases when bankruptcy is a consideration we strongly advise against it and develop Non-Chapter 11 Solutions. Chapter 11 filing is not necessary in many cases, but many business owners file needlessly limiting possible solutions with creditors. This also exposes the filer to excessive legal fees and intrusive financial and asset reporting. Our recommendation is to seek solutions that avoid Chapter 11. Your needs and even the needs of your creditors are better served by alternatives.

Non-Chapter 11 Solutions

Creditors would rather come to a payment agreement than see a debtor file Chapter 11 protection. They will likely see more debt repaid and benefit from future business by structuring a workout.

The chapter 11 bankruptcy code provides reorganization, usually involving a corporation or partnership or an individual in business. A chapter 11 debtor usually proposes a plan of reorganization to keep business alive and pay creditors over time. Only in rare cases is bankruptcy recommended as there are usually a better solutions that are more equitable for the business and creditor. Learn more about chapter 11 at the following link: chapter 11 information