5 Key Components Of A Small Business Acquisition Loan

Qualifying for a small business acquisition loan can be quite an ordeal to say the least.

If the business being sold is very profitable, the selling price will likely reflect a significant amount of goodwill which can be very difficult to finance.

If the business being sold is not making money, lenders can be difficult to find even if the underlying assets being acquired are worth substantially more than the purchase price.

Business acquisition loans, or change of control financing situations, can be extremely varied from case to case.

That being said, here are the major challenges you’ll typically have to overcome to secure a small business acquisition loan.

>>> Financing Goodwill

The definition of goodwill is the sale price minus the resale or liquidation value of business assets after any debts owing on the assets are paid off. It represents the future profit the business is expected to generate beyond the current value of the assets.

Most lenders have no interest in financing goodwill.

This effectively increases the amount of the down payment required to complete the sale and/or the acquisition of some financing from the vendor in the form of a vendor loan.

Vendor support and Vendor loans are a very common elements in the sale of a small business.

If they are not initially present in the conditions of sale, you may want to ask the vendor if they would consider providing support and financing.

There are some excellent reasons why asking the question could be well worth your time.

In order to receive the maximum possible sale price, which likely involves some amount of goodwill, the vendor will agree to finance part of the sale by allowing the buyer to pay a portion of the sale price over a defined period of time within a structured payment schedule.

The vendor may also offer transition assistance for a period of time to make sure the transition period is seamless.

The combination of support and financing by the vendor creates a positive vested interest whereby it is in the vendor’s best interest to help the buyer successfully transition all aspects of ownership and operations.

Failure to do so could result in the vendor not getting all the proceeds of sale in the future in the event the business were to suffer or fail under new ownership.

This is usually a very appealing aspect to potential lenders as the risk of loss due to transition is greatly reduced.

This speaks directly to the next financing challenge.

>>> Business Transition Risk

Will the new owner be able to run the business as well as the previous owner? Will the customers still do business with the new owner? Did the previous owner possess a specific skill set that will be difficult to replicate or replace? Will the key employees remain with the company after the sale?

A lender must be confident that the business can successfully continue at no worse than the current level of performance. There usually needs to be a buffer built into the financial projections for changeover lags that can occur.

At the same time, many buyers will purchase a business because they believe there is substantial growth available which they think they can take advantage of.

The key is convincing the lender of the growth potential and your ability to achieve superior results.

>>> Asset Sale Versus Share Sale

For tax purposes, many sellers want to sell the shares of their business.

However, by doing so, any outstanding and potential future liability related to the going concern business will fall at the feet of the buyer unless othewise indicated in the purchase and sale agreement.

Because potential business liability is a difficult thing to evaluate, there can be a higher perceived risk when considering a small business acquisition loan application related to a share purchase.

>>> Market Risk

Is the business in a growing, mature, or declining market segment? How does the business fit into the competitive dynamics of the market and will a change in control strengthen or weaken its competitive position?

A lender needs to be confident that the business can be successful for at least the period the business acquisition loan will be outstanding.

This is important for two reasons. First, a sustained cash flow will obviously allow a smoother process of repayment. Second, a strong going concern business has a higher probability of resale.

If an unforeseen event causes the owner to no longer be able to carry on the business, the lender will have confidence that the business can still generate enough profit from resale to retire the outstanding debt.

Localized markets are much easier for a lender or investor to assess than a business selling to a broader geographic reach. Area based lenders may also have some working knowledge of the particular business and how prominent it is in the local market.

>>> Personal Net Worth

Most business acquisition loans require the buyer to be able to invest at least a third of the total purchase price in cash with a remaining tangible net worth at least equal to the remaining value of the loan.

Statistics show that over leveraged companies are more prone to suffer financial duress and default on their business acquisition loan commitments.

The larger the amount of the business acquisition loan required, the more likely the probability of default.

10 Questions a Small Business Owner Should Ask

It is the beginning of a new year and traditionally the time for resolutions, review of goals – both past and present and time to set our goals and objectives for the new year. Many of us were busy reviewing the past year with a glass in hand and deciding on the standard resolutions at about five minutes to midnight on December 31. Sadly, many small business owners treat their business goals and strategies with the same considerations and thoughtfulness. Many new clients tell me: “I don’t need to do a business plan or strategic planning; I don’t need financing and I’m just a small business.”

Here are 10 questions every small business owner should ask themselves about their business:

1. Do I have a budget for the current year?

2. Do I know how much and where my company spent money last year?

3. Do I know what my cash flow looks like for the next six months, next year?

4. Do I have specific plans for generating new business?

5. Do I know where my business came from last year?

6. Do I know who my customers are and why they buy from me and not my competition?

7. Do my clients regularly refer business to me?

8. Do my employees know what is expected of them?

9. Do I have written procedures and policies?

10. Do I receive regular reports on sales, quality, budget variances, profit, customer satisfaction and employee performance?

Even as a sole proprietor, without employees, it is important that you know the answers to the above questions. By being able to answer yes and articulate your responses you position your business to succeed.

Budgeting and Cash Flow

As a small business you may not think you need a budget. Without some idea of your overhead and expenses you will have no idea how to price your products or services so that you generate a profit, or at least break even. Creating a budget is not complicated. You don’t need expensive software programs. Microsoft Excel comes with a budget template; if you don’t have a computer you can even use paper and pencil.

By creating a budget and reviewing it at least weekly you are able to track your expenses and manage them. Taking it to the next step, reviewing last years budget and looking closely at where you spent your money allows you to make better decisions on this year’s budget items. It is also important for you to know what your cash flow looks like, remember cash flow and profit are two different animals. You can price your products so that you have a 35% profit, but your accounts receivable may be lagging behind your accounts payable. You need to pay close attention to when your customers pay you. If you know your biggest customer always takes 45 days to pay your invoices, without careful planning you may miss a payroll or pay your vendors late.

Business Development

Sometimes, we begin to take business for granted. It is easy to become complacent; we are able to pay the bills, even put some money back into the business. We stop looking for new business, because we are comfortable. When this happens, it is just a matter of time before the business is in trouble. You need to have a defined plan for generating new business and you need to work your plan consistently. By evaluating your existing customers and discovering why they buy from you, you can devise a marketing plan to generate additional business. Your existing customers can be your most cost efficient generator for new business. Ask for referrals and provide incentives. By rewarding your existing customers for referring new business to your company you are getting twice the value – satisfied existing customers and new customers who have already been sold on your products and services.

As a caveat – if most of your business comes from just a few of your customers you should make it a point to broaden your customer base. If one customer provides 50% of your revenue and they go out of business or choose to buy from a competitor your business will be struggling until you can replace that revenue.

Policies and Procedures

As your business grows you may find the need to hire additional associates. The best way to get the most out of your investment in human capital is to make sure your employees know what is expected of them. By developing clear and detailed policies and procedures and providing them to your employees you create an environment for success. Providing your employees with written policies and procedures makes it easier for them to do their jobs efficiently. Expectations are clear and when there are questions, it is an easy matter to refer to the policy or procedure. Written policies and procedures give clarity and direction to your managers and supervisors on how to handle specific employment issues fairly and consistently. The relatively small investment of time initially will save you much time in the future.

Measuring Success

You must set specific and measurable standards and goals for your business. You can’t measure success if you don’t know what it looks like. As you were preparing your budget for the year, you should have set sales goals, established quality standards for your products and services, and performance goals for your employees. At a minimum, you should review your sales, budget variances, accounts payable and receivable, and P&L monthly. By constantly reviewing your results and holding yourself and employees accountable you can and will achieve your business goals.

Is it a Hobby Or a Business?

Every internet marketer or would-be online business owner eventually reaches a point where they have to ask themselves: “Is this just a hobby, or a serious business?”

It’s all too easy to fall into a pattern that amounts to spinning your wheels and getting nowhere fast. Why does this happen? There are many reasons, I’m sure, but I think there are a few very common situations.

Perhaps you casually came across some “make money here” websites and decided to try it in your spare time, just for fun. Maybe you were really looking for a way to earn some extra income, but never planned ahead or only haphazardly spent any time with it. Maybe each program you tried didn’t generate enough cash fast enough, so you keep trying something new.

Whatever the reason, you are certainly not alone. Probably the vast majority of those trying to make some money online have not yet realized that for any business to succeed, it must be treated as exactly that – a business. No one can expect mounds of cash for what amounts to playing around. No one expects an offline business to generate a profit immediately, with no investment of time, money, advertising, etc.

I’ve been drifting around the internet for three years, in and out of many different businesses and programs. While I’ve had limited success here and there, I didn’t really commit to giving any one business enough time to really grow. As I take stock of where I am, it is disappointing. I have definitely learned quite a bit, which does make some of the time worthwhile, but I feel I’ve squandered opportunities – usually because I didn’t want to spend too much money, and then didn’t really have the time needed for the free methods of advertising. Of course, there also was the issue of my husband breathing down my neck to show fast results for all this time I spend online.

What can be done about this? Anyone who finds themselves contemplating this question of hobby vs. business needs to take some time to evaluate their goals. If a substantial income is not really needed at this time, then there probably is no need to change anything – just keep playing around with every new thing that comes along.

If, however, you are serious about building a home based business, it’s time to treat it seriously. There are many good opportunities and programs out there which can build a decent income for anyone who applies themselves, works hard, and follows the paths that successful entrepreneurs have laid out for us. No, these are not the glamorous, exciting, brand new launches full of breathless hype, but the steady, proven businesses that have been around for years.

Is it possible to earn a living online? Yes, I believe it is, because so many people really are doing it. It’s time to make a choice – get serious about a real business, or continue jumping around for fun. It’s all up to you.