The Entrepreneurs Advocate

Archive for the ‘Finance’ Category

Interest in Angel Investing from both investors and the entrepreneurs who need the money is at an all time high. Many of the participants from both camps are relative neophytes at the process. Here is a list of common pitfalls that can plague both Angels and Entrepreneurs.

Miss-Matched Expectations & Goal Alignment: Angel investing is a type of marriage and we all are aware of the poor statistics related to marriage success rates. The following bullet points mostly reference un-aligned expectations by all parties involved.

Risk Appetite: If the Entrepreneur’s company is little more than an idea with zero to little sales, capital received from the Angel needs to be “flyer” money- i.e. if it doesn’t come back, no ones life is ruined. What people think their risk appetite is and what they can really stomach (a 50% stock portfolio drop in one year for example) needs to be fleshed out in black and white.

Management Styles: Does the Entrepreneur just want the capital and then be left alone? Does the Angel’s capital come with the expectation of being part of every decision big or small? I know of numerous examples were Angels and their Entrepreneurs are NO longer on speaking terms because the right questions and leadership parameters did not get asked before funding. An honest review done by a competent third party with no skin in the game is highly recommended.

Exit Strategy (or lack thereof): When is the day a company should start Exit Planning? The day the company is created. Bankers Advocate is in the Exit Strategy business and we see time and time again that a concise and flexible plan needs created and constantly updated. Time is not your friend and all contingencies need discussed. If the Entrepreneur expects to run the company forever and the Angel Investor is expecting a liquidity event in 3-5 years that and other differences need worked out. A viable Exit plan that all stakeholders agree on needs formulated.

Single Investor or Angel Group? For the Entrepreneur to receive monies/expertise from a group versus an individual is highly desirable but not always doable. As they say, beggars can’t be choosers. However, the skill sets a group can bring and the group dynamics of multiple Angel’s can help temper the idiosyncrasies of a single investor.

Candid Answers to Tough Questions: This point is squarely directed at the Entrepreneur. You will be asked many tough, smart and insightful questions. Your answer should never be a guess. I would recommend multiple roll playing sessions with your advisers to fully vette your presentation. Audiences can tell when you are just winging it and all credibility is quickly lost.

In summation, both those in need of and the suppliers of capital need to ask honest and sometimes humbling questions of themselves. The right research done before the check is cashed can save a tremendous amount of grief and frustration later.

“Note: This article is from the Orlando Business Journal - by Kent Hoover Washington Bureau Chief, but it is being reported in numerous publications. The SBA 7-A program is the key lending product to buying/selling a business worth less than $4 million. Onerous was not a strong enough term to describe the $250,000 Goodwill cap.”

The U.S. Small Business Administration delayed implementation of a new $250,000 limit on the amount of goodwill that can be financed by 7(a) loans in a business acquisition.

The new limit was scheduled to go into effect March 1, but the SBA responded to concerns raised by business brokers and lenders, who contended the rule would make it impossible to use government-guaranteed 7(a) loans to buy many businesses, particularly service businesses or professional practices.

Goodwill includes the intangible assets of a business that create cash flow, but do not have a book value. Hard assets such as real estate or equipment are not included in goodwill.

On Feb. 6, the SBA advised lenders that, in cases of business acquisitions, no more than 50 percent of a 7(a) loan should be used to finance goodwill. In no case should goodwill account for more than $250,000 of the loan amount, according to the SBA’s guidance.

Because of the uproar over this limit, the SBA decided late Feb. 27 not to implement it until at least Aug. 31. Until then, the agency will review requests to exceed the $250,000 goodwill limit on a case-by-case basis.

The agency will analyze the types of businesses and transaction structures submitted in these applications to decide what limits should be placed in the future. The SBA currently does not have data on the amount of goodwill financed by its past business acquisition loans.

Note: “I found today’s press release from the SBA very interesting.” Chris

WASHINGTON – In response to the financial crisis, the U.S. Small Business Administration today announced it is strongly encouraging its participating 7(a) lenders and Certified Development companies to work with business borrowers to provide them with the flexibility they need to keep their businesses running during these difficult economic times.As access to credit and capital has tightened, many businesses face increased challenges in meeting their financial obligations. This is especially true of small businesses hit hard by the recent economic slowdown that are now unable to make payroll, or purchase essential inventory.

SBA is reminding participating lenders they have the authority on a case-by- case basis to extend temporary payment relief for qualifying borrowers with 7 (a) and 504 loans who are struggling to make their payments.”The SBA is here to help small businesses during these difficult economic times. We are encouraging our lending partners to follow suit by extending three-month payment deferments on their SBA guaranteed loans to qualified borrowers who need relief,” said SBA Acting Administrator Sandy K. Baruah. “We recognize that small business owners are faced with challenging decisions right now. By providing three-month deferments to qualifying borrowers who are struggling, our lending partners can help small business owners free up the capital they need to maintain their businesses.” If a deferment longer than three consecutive monthly payments is needed for a loan, borrowers can work directly with their lenders who in turn will work closely with the SBA to identify the best solution.

You can utilizing a Versatile Entrepreneur Retirement Savings Account Plan (VERSA).

The VERSA Plan structure allows you to rollover your 401(k), or other qualified plan, into the equity of a new or existing business without the burden of taxes or penalties. Frequently we are asked if the VERSA Plan is a loan. No, it is not a loan. It is equity.  In addition, it meets all of the equity requirements of commercial lenders and the SBA alike.  The capital that is rolled into the VERSA Plan is used to buy the equity of the company just as you would buy a mutual fund or a stock in your qualified plan.  That stock is then held in the plan for the benefit of the business owner. 

One caveat, your new company needs set up as a “C” corporation by the lawyer who sets up the VERSA for you. We have used the VERSA numerous times for Entering clients or Entering Buyers to access their retirement funds with no tax penalty.

SBA backed loans are down 31% in South Florida. The new SBA SOP (standard operating procedures) have made the rules more onerous for Entering clients and prospects. A constant refrain we hear from banks is we would have done this deal a year ago. In the past we would have placed loans with 1-2 target banks and typically that was good enough. Now we place packages at 3-5 lenders and are constantly researching new lender’s risk parameters and appetite for loans by market segments.

This is toughest borrowing market we at Bankers Advocate have seen in in 10-15 years. What steps can you take to make sure a lender will fund your transaction?

• Books and Records Current and Error Free- Many posts in this blog harp on this subject, but it is even more important in this tough lending environment.
• All Loans Now Require a Business Plan- A good idea before becomes a requisite now. Much of the data gathered during the third party appraisal process can be used in a business plan. Having the data will make this go smoother and faster. Also, it is a good learning and team building exercise for the Entering and Exiting entities to work on this together.
• Third Party Evaluations Required-We have never taken an assignment without one being done. It is good to see the SBA back us up.
• Source of Equity-Rules have tightened on borrowing monies against your house and other assets. Coverage on this new debt cannot be only covered by the cash flow from the new business. Verification of funds by the lender has been made stricter too. Documentation and analysis needs done prior to the loan being submitted.
• Change in Ownership must Benefit the Business-This is a tricky one, but we can help write the narrative for the loan documentation.
• Exiting Seller Financing-Lenders like to see the Exiting  party “invested” in the process. Some amount of seller financing is encouraged  and even required on some deals by the SBA.
• Experience of Entering Buyer-A good resume, track record and tying this together with a good business plan is paramount. This needs addressed early in the process as this variable has become a deal breaker.

Deals (and loans) are still getting done, but planning, structure and choosing the correct lender(s) is even more critical in these challenging times. 

Here are seven more reasons that your business did not sell or sold at a steep discount:

6. Bad Location or Lease: A great franchise in lousy location makes for a failing business. Also, too high a rent as a percentage of sales can make it tough to survive. Thirdly, if your landlord won’t play ball with the buyer or the buyer’s bank, it can queer a deal.

7. Poor Growth Outlook: The old adage goes “Buyers pay based on your history in anticipation of the future”. If the future prospective sales don’t look that rosy, why would a buyer take the plunge?

8. Out of Favor Industry: Florida construction companies for sale in 2008 are taking longer to draw interest, even the good ones. They are getting tarred with the same brush as failing companies. The key is to stand out versus your peers.

9. “One Man Band” Syndrome: Entering parties are looking to buy a company with good systems and procedures in place. If they see an Exiting owner who is frazzled, over-worked and whose company’s existence depends on him; that is not very appealing. Next…

10. Unrealistic Price: See Point #5 from the prior post, It will not Support Financing. You think your business is worth $5 million and an unsophisticated buyer will pay $5 million (it rarely happens) but the bank, backed by an appraisal will only loan $2 million.

11. Sales/Cash Flow trending down: This is part and parcel of point #7. Unless your business is distressed and a turnaround professional is called in, an Entering Party wants to see plenty of business in the pipe line and margins improving.

12. Not willing to give out enough data: I see this from time to time. Exiting Clients are (rightfully) worried about sharing too much data. But sometimes it goes beyond that. What are they hiding? Has trust become an issues? Screening Entering Parties up front to make sure they meeting the buying criteria will prevent this. A well-written Non Disclosure is a must.

I get asked by potential Exiting Clients how the tighter lending environment is affecting the market for their company. I see a couple of things happening in the market place:

Deals are still getting done- Fairly priced companies under $10 million are moving nicely. It seems the smaller the deal, the less radical the lender requirement changes. However, getting deals financed is still tougher than it was a year ago and Buyers must “line up” correctly for the bank.

Private Equity has moved “Down Stream”- PEG’s (Private Equity Groups) have funds that must be employed and they are looking at smaller deals than they have historically done in the past. These smaller deals are typically easier to get funded.

Due Diligence: Slower and Pricier- Because of stricter lending requirements and Potential Buyer’s being more gun shy, due diligence can be drawn out and more expensive for both sides. This alone is a good reason to get a reputable third party appraisal and pre-financing in place. Cleaner books and records will help your business stand out and reduce transaction costs.

More Corporate Buyers- With the big company layoffs and turmoil, more middle management types are looking to leave the corporate world and build there own economic engine. While always strong, I have seen an uptick in these type buyers.

The International Buyers are Coming- There have always been foreign buyers looking for businesses in the US. However, with the strength of their home currency versus the USD, this has accelerated. I have been asked to give seminars in Canada and Great Britain to potential buyers who can also use buying a US business as a vehicle to get a visa.

You can see this is still a fine time to Exit Business Ownership. Whether the Prime Rate is 20% or 5%, the proper steps still need to be taken before your business is brought to market.