I attended a webinar a few weeks ago called "Best Practices in Buying and Selling a Business with a Focus on Financing." It explored the availability of transactional financing to buy or sell a small business. BoeFly.com, an online matchmaking site that pairs borrowers with lenders presented the webinar. Mike Rozman, BoeFly's co-president moderated the panel with expertise in buying and selling small businesses, financing, appraising and brokering existing franchises.
To start the event, Rozman introduced Beth Solomon, vice president of the International Franchise Association. "The IFA and BoeFly have a strategic alliance in which we're working together to offer tools and solutions, good advice, counsel, information that our members can use to advance in franchising, especially on the financing side," she said.
BoeFly and IFA created and maintain the IFA/BoeFly Franchise Lending Index to track trends in franchise financing activities. BoeFly.com has over 125 franchise brand members that direct their franchisees to more that 2,400 active member/lenders who make small-business loans.
Even though banks are making small business loans available for the right deals, "seller financing is a key way the sellers in today's market are really differentiating their businesses and really helping to get deals done," said Curtis Kroeker, one of the panelists. He is a vice president and general manager with BizBuySell.com and told the attendees that small-business lending is not flowing as briskly as it did before the Great Recession.
For bankers to loosen their purse strings they must feel more optimistic about the economy, the government's fiscal discipline and pending regulatory rules that have yet to be written. Until then, lenders will continue to cherry-pick the best deals and more marginal applicants will be cast aside.
"For us," said Tony Kim, vice president with Brookfield, Wisconsin-based Ridgestone Bank, "it's weighted so heavily on the buyer, his experience, his background." Tom Abraham, also a Ridgestone Bank vice president, added, "We believe the borrower has to have some liquidity going into the deal in terms of working capital and start-up costs."
The amount of liquidity and down payment required will vary from lender to lender and deal to deal. In general, however, a 20 percent to 30 percent cash investment from the borrower is an industry standard. Some lenders, such as Ridgestone Bank, will consider seller financing as part of the down payment when it is subordinated to the bank financing and structured to complement the lender's senior position.
Lenders also look at the subject company's market value as well as the resale value of its collateral, should liquidation become necessary to repay the loan. Accordingly, Neal Patel, certified business appraiser and principal of Cranbury, New Jersey-based Reliant Business Valuation, told the attendees that the rules of thumb can come in handy to ballpark a company's value. "The price to earnings multiple is pretty simple," he said. For example, if an "earnings stream is $100,000.00, a two times multiple would mean your value, the value of your business, is about $200,000.00." The multiples vary by industry and company size.
Michael Arrowsmith, managing director for the Tampa, Florida office of National Franchise Sales said that his view is somewhat different since his company re-sells existing franchise units. "Our market might be a little bit different," he said. "(This is) by far, the busiest year and most successful year we've had in the last five." Most of his buyers are already in the franchise business, do not need seller financing and have the kind of track record that lenders want.
"Typically the folks that we deal with are experienced in the franchise industry," Arrowsmith said. "So they're able to get this financing that's out there for select brands and select type of buyers."
Many small business owners sell too quickly when they burn out and feel a sense of urgency to change their lifestyle. Consequently, their business suffers and buyers make lower offers. "If you're thinking about selling your business, you'd better start thinking of it three years earlier," Arrowsmith says. "Your focus needs to be on building your business, building your sales, putting a strong team in place, managing your business; and don't take your eye off the ball."
Rozman, the BoeFly moderator, wrapped up the formal session and orchestrated a question and answer session. He also pointed prospective borrowers to BoeFly's Fundability App which estimates how many of BoeFly's 2,400 lenders might be interested in financing a specific business by plugging in a few salient details.
The webinar recording and transcript is posted online.
Jerry Chautin is a volunteer SCORE business mentor, business and real estate columnist, blogger and SBA's 2006 national "Journalist of the Year" award winner. He is a former entrepreneur, commercial mortgage banker, commercial real estate dealmaker and business lender. You can follow him at www.Twitter.com/JerryChautin.
Copyright © 2012 Jerry Chautin -- All rights reserved