Be flexible when selling your business

  • Follow Your Business

Over the years, I have met with hundreds of business owners who were considering selling their business.

When we start to discuss the details of the transaction, the conversation normally goes something like this: "Now I would like to sell the business if I could get the right price, but I want all cash. I am not interested in doing any financing."

It is understandable that sellers of a business want all cash. When they sell the company they want to turn it over to the new owner, help transition the business and then walk away. Often, the reason they want to sell is to remove the stress of day-to-day ownership.

Despite this desire, in the vast majority of small business sale transactions, the seller will be involved in at least some portion of financing. The unfortunate reality is that lending has become more difficult. The Small Business Administration (SBA) 7a loan program, which is the primary way lenders make small business acquisition loans, requires that the seller be asked to finance some of the purchase. Many sellers believe the buyer is the key factor lenders look at in deciding whether to make a business acquisition loan. However, the biggest factor is the business itself. The lender wants assurances that the business has the financial ability to repay the loan.

Here's a list of the most critical factors that can prevent a business from obtaining bank or SBA financing.

POOR OR LIMITED FINANCIAL STATEMENTS: Lenders require at least three years of tax returns on the business to make a decision about lending. Those tax returns have to show enough free cash flow to repay the debt incurred by the purchase and pay the new owner a salary to cover living expenses, in addition to having some cushion, usually 25 percent.

The cash flow must be documented as a combination of net profit, owner's salary, interest expense and depreciation/amortization. These items appear on the first page of the businesses tax return. There are exceptions, but lenders really don't like to see too many owners perks "added back" to the net profit. It is not unusual for business owners to expense their vehicle, non-working spouse, country club dues, etc. This is done to reduce the owner's tax liability but lenders hate it, and it makes getting a loan more difficult.

ONE CUSTOMER MAKES UP MORE THAN 20 PERCENT OF YOUR BUSINESS: Lenders call this "customer concentration," which simply means that your business has too many eggs in one basket. This could be your best and most reliable customer, but from the lender's perspective, there is always the risk that losing that customer could tank the business. Many businesses cannot survive the loss of 20 percent-plus of their business in one shot. If your company does have this problem, do what you can to diversify your base. This will put your company on stronger footing and help get you cash when you decide to sell.

SALES DECLINED OVER THE PAST FEW YEARS: Everyone knows that we have seen one of the worst recessions in our lifetime, and your company might have done a stellar job of cutting costs and riding this storm. However, declining sales trends can be a deal killer to a lender. The main reason is the lender doesn't feel as if they know where the bottom will be. They simply won't risk riding with your business while it is on the downswing.

Of course, it is not all doom and gloom. There are varying degrees of issues and you might be able to overcome one depending on the circumstances and your flexibility.

About two years ago, we sold a company that had almost 70 percent of its sales through one customer. This is a severe customer concentration problem that would normally kill most deals. The company had excellent financial records and showed a strong positive cash flow. We were able to finance a purchase price of $1.2 million.

Here is how we did it: The customer wrote a letter telling the lender that it had no intention of leaving the company post-sale, and the seller took a subordinated note to the lender and financed $350,000 of the purchase price.

The seller wasn't crazy about financing that much of the purchase, but it was the only way to make the deal happen.

A seller that has reasonable expectations of financing options in today's lending environment will be much better positioned to make an informed decision when deciding about his future and the company's.

David Yezbak is the president of Sunbelt Business Brokers in Augusta and Columbia.

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hirg_cola
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hirg_cola 04/18/11 - 06:18 am
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This is a very good,

This is a very good, informative column. Thanks for the info.

William Bruce
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William Bruce 04/18/11 - 06:39 am
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Excellent column, and is

Excellent column, and is "right on" advice in today's economy. I've clipped it to show to sellers in my area.

William Bruce, President
American Business Brokers Association
www.WilliamBruce.wordpress.com

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