Business acquisitions may be financed in a variety of ways. Buyer’s either pay all cash, becoming their own financier, seek Seller Financing or Third Party Financing through an SBA Loan, Conventional Commercial Loan, Home Equity Loan, Private Party Loan, Venture Capital, etc. There are other sources who lend against assets or accounts receivable, (known as factoring) for specialized situations once you own the business.
In a cash transaction the Buyer has no debt after the acquisition. This takes a lot of pressure of the new business owner. They may have structured the sale from an accounting standpoint to have loaned their Corporation the money, so the Corporation has to repay the individual the loan, but they are repaying themselves in a sense. This is a nice option. As long as you have left yourself appropriate working capital to run the business you can immediately start repaying yourself with the profits of the business, having no debt service or interest due to an outside source.
With seller financing the Seller typically has a first position lien on all the assets and inventory of the business. It show a lot of confidence in the business and the Buyer for the Seller to do this and generally these types of transactions require a substantial down payment, usually 1/2 or more of the overall purchase price. If the Buyer defaults the Seller with take back the business. Many Sellers are unwilling to do this as they do not how the Buyer will perform and they may be relocating or just not want to be in the position to have to take the business back. If the Seller will hold even a small amount of paper in a transaction, it is likely they will answer the phone when a Buyer has a question post closing. This is a big potential benefit. However the Seller usually likes to have a first position lien or some realistic collateral to do this. They don’t want to be in a secondary position with no collateral.
SBA financing can generally be done with between 20-25% down of the overall project cost. Project cost refers to the price of the business, loan closing costs, working capital etc. It is possible to put say $100,000 down on a $500,000 transaction and get $20,000 or more back at the closing table for working capital. Lack of working capital is one of the biggest reasons small businesses fail. They put every dime into the acquisition and may have immediate cash flow problems because of lack of cash flow from businesses that carry large accounts receivable or perhaps may be seasonal for example. Having working capital that at least matches the receivables is a minimum rule of thumb. (assuming your not buying the receivables in an asset sale) The Buyer may not start receiving A/R for 45 to 60 days after the acquisition, but meanwhile will be incurring payroll, cost of goods, operating expenses, etc.
SBA Loans put a first position lien on all the assets and inventory of the business, current and replacements. They also look for additional personal collateral, a second on your house, or a lien on other personal assets. Business assets can be here today and gone tomorrow and Lenders don’t give much credibility to the assets really securing their loan. Some Lenders won’t even do SBA loans unless the businesses real estate is involved. Then, in a worst case scenario, they have something to go after. These loans require excellent credit on behalf of the Buyer / Borrower and well documented cash flow on behalf of the Business / Seller.
It typically takes about $25,000 of cash flow or owner benefit to service every $100k of debt as a rule of thumb. Lenders look for a 1.2 or 1.25 debt service coverage ratio. This means the businesses cash flow must cover the debt service and the Borrowers salary requirements 100% and then have a 20-25% safety margin of unutilized cash flow. Generally speaking, your 20-25% equity into an SBA loan is not supposed to be borrowed money, this hampers your debt service coverage ratio and the Lender must account for repayment of that loan as well, however many Buyers do take home equity loans out first and use the money as their equity into an SBA loan.
Conventional commercial loans from the commercial loan division of your favorite local bank are tough to get on a small business unless you can collaterize the loan with personal assets. These loans are generally much easier and faster, but are typically based on your personal net worth, banking relationships and willingness to pledge personal assets.
Below is a list of professional service providers in our area that have been recommended by past clients of Acquisition Experts, LLC. We strongly urge Buyers and Sellers to seek appropriate counsel and representation when buying or selling a business.
James M. Guest, CPA, P.A.
Proctor, Crook, Crowder and Fogal, CPA
We can assist you in locating a business that can qualify you to work and live in the US. There are many ways to remain in the US legally when you want to own a business but the most popular ways are as an E investor/treaty trader or as an L-1A intra-company manager or executive.
The first step in this process is buying the right business so that you can live and work in the US either short or long term. We are ready to help you begin this process and can also refer you to a qualified immigration attorney that works well with our team of brokers to help you apply for a visa in one of the categories above.
To qualify as an E-2 investor you must purchase an existing business or develop a new business. We can help you find the right business to qualify or space to develop your business. The US and your country of citizenship must have an E visa treaty. The investment should be around $100,000 and be able to support several workers, the number of workers will depend on the country you are from. Any type of business could qualify except real estate development companies can be problematic.
To qualify as an E-1 treaty trader, 50% of the trade or services between the US and your business outside the US must exist. There must be a E-1 treaty between the US and your country of citizenship. There is no set investment amount required or certain amount of employees for this visa type.
The E visa process can be complicated but with the right team guiding you it’s a great way to own and run a business in the US.
Sometimes there is no E visa treaty with the US, in that case an L-1A can be a great way to pursue your dream of owning a US business and living in the US. The L-1A visa requires that you have a foreign business that you have worked for either as a Manager/Executive for one of the last three years before applying for this visa. The US and foreign company must be owned by the same persons or entities in the same or similar proportions and both the US and foreign company must be actively doing business.
Both E and L visa categories could lead to permanent residence status aka a green card but you will need an immigration attorney to advise you on the best strategies to achieve your long-term goals.
A foreign buyer often wants to reside in the US long term but needs to invest either $500,000 or $1 million in a US business. How much they need to invest depends on where the business is located. A single investor in a US business is called a stand alone EB-5.
If the business is located in a Targeted Employment Area (“TEA”), an area determined by the state your business is in or the US Immigration Service to have a high unemployment rate or in a rural area then the amount of the investment could be $500,000 not $1 million. However, most EB-5 investors still need to create 10 full time positions at least 35 hours a week despite where the business is located. There are a few exceptions to this rule such as the troubled business exception that the US business has to maintain the jobs at the business but it will only qualify for this if it meets certain financial requirements based on serious financial issues with the company.
Some foreign investors wish to invest in Regional Centers, where the investment they make is part of a larger project that benefits the US economy. Some investors prefer this because the 10 positions they need to create can include independent contractors but the stand alone EB-5 investors can’t count independent contractors.
Common used terminology used in the mergers and acquisitions industry.
A declaration by someone that something is true.
A sworn statement; written oath such as acknowledgment.
A solemn declaration; a non-religious oath.
The legal relationship between a principal and his agent arising from a contract in which the principal engages the agent to perform certain acts on the principals behalf.
A written explanation to be signed by a prospective buyer or seller, explaining to the client the role that the broker plays in the transaction. The purpose of disclosure is to explain whether the broker represents the buyer or seller or is a dual agent (representing both) or a subagent (an agent of the sellers broker). This allows the customer to understand to which party the broker owes loyalty.
A person (natural), corporation, society, association or partnership (legal persons) acting by authority of a principal in a realty transaction for compensation.
A bilateral contract whereby buyer promises to buy and seller promises to sell by execution and delivery of deed; also know as Purchase and Sale Agreement (P&S). Agreement means the same as Contract.
Act of liquidating an indebtedness by equal and periodic payments usually monthly; this direct reduction method means each payment remains constant but ratio of principal and interest changes with an increasing larger portion credited to reducing debt; savings and loan associations popularized method.
An estimate of value.
Increase in value resulting from market forces such as demand stronger than supply.
A writ issued, beginning or during a legal action commanding sheriff to attach (seize) property, rights and effects of defendant to satisfy possible credit demands of plaintiff if judgment comes out in plaintiffs favor.
Anyone who is authorized in writing to perform certain acts for another under written power of attorney; valid only during lifetime of party giving this power.
Bill of Sale
A written instrument which is the evidence of transfer of one persons right in personal property to another.
Investments of cash for improvements to remain competitive in a business.
Have an economic life of one year or more and the cost is moved to the balance sheet, and then these costs can be written down by depreciation or amortization over time.
Profit after principal and interest are deducted from net operating income (NOI).
Costs of seller and buyer at conveyance of realty.
A written accounting of funds to seller and buyer at passing of papers.
A security, such as a mortgage, given to protect debt.
The mixing of funds held for the benefit of others with the brokers personal or business funds.
Money or other valuable consideration given to broker by principal for services rendered; amount is by agreement.
Conditional Sales Contract
A contract in which owner retains title until buyer has met all terms and conditions; a familiar device in land sales; also called land contract or installment contract. Buyer acquires equitable title until final payment; after delivery of deed, buyer has legal title.
Something of value exchanged between parties of a contract; money, services, goods or promises.
A legal instrument between two parties to do or not to do something; in reality, it must be in writing to be enforceable.
Counter Offer: voids first offer and creates new offer.
A promise in an agreement or contract agreeing to performance or nonperformance of certain acts, or requiring or preventing certain acts or uses.
A pact that forbids buyers, sellers, and their agents in a given business deal from disclosing information about the transaction to others.
Court award to lender if sale at public auction does not equal mortgage debt.
Decrease in value for various reasons
Due diligence is often performed on the acquirer as well as the target
Deposit or binder given with Agreement to Buy.
Value or interest an owner of realty has above ay debt on property; difference between value and mortgage debt.
The holding of something of value by a person (escrowee or escrow agent) for the benefit of other parties.
Exclusive Right to Sell
An employment agreement and contract giving the broker the right to receive a commission if the property or business is sold by anyone including the seller during the term of the agreement.
Anything that a company buys that has an economic life of less than one year. It shows up immediately on the income statement.
A position of trust (e.g. broker to principal).
Fee to broker for arranging loan for client; can also mean fee to broker for locating a property for client
Owner receives rent and pays out expenses such as in apartment leasing; Net Lease: owner receives rent and tenant also pays out expenses normally paid by owner such as taxes, etc.
A court action describing indebtedness of one to another.
Contract between lessor (landlord) and lessee (tenant) for exclusive possession of realty for specified period under specific terms after which property reverts to lessor.
The purchase of improved property and the leasing of it back to seller; creates capital and favored tax treatment for seller.
The interest which a lessee has in realty.
Letter of Intent
A document agreement between a buyer and a seller used in connection with the acquisition of a company. The letter of intent describes the basic terms and conditions of the transaction between the buyer and the seller, including price, due diligence periods, exclusivity or no-shops, and the basic conditions to closing the deal. Customarily presented before a definitive purchase agreement is entered into, the letter of intent provides a road map for the parties involved in the transaction.
A debt; a claim against property for payment of some debt.
Notice filed in a registry of deeds warning all persons that title to certain property is in litigation.
A written engagement (contract) between a principal and an agent authorizing the agent to perform services for the principal involving the principals property (business). Generally the services provided by the agent involve the proposed sale of the principals property or business. Also, the property or business listed by the agent is called a Listing.
To obtain a Listing Agreement
A legal term that means the cause resulting in accomplishing a goal. Used in real estate [or business brokerage] to determine whether a broker is entitled to a commission.
A statement or condition made that something is true or accurate.
CLP (Certified Lender Program)
This process is for the more sophisticated and experienced lenders who have graduated beyond GP status. Typically, the lender now submits a complete package to the SBA and as a CLP Lender they are guaranteed a 3-day turnaround from the SBA.
GP (General Program)
This is the lowest rating and is given to lenders who know little about the SBA process. These lenders must submit each loan application to the SBA for additional underwriting and ultimate approval. This process can take up to two weeks with multiple requests for additional information.
PLP (Preferred Lender Program)
This is the top designation and enables the respective lenders to approve their own loans with no additional underwriting by the SBA. Typically, this designation means that the lender has sufficient experience and track history to adhere to SBA standards and make quality loans.
To make a special demand for something as a condition of an agreement.
An expressed or implied statement that a situation or thing is as it appears to be or is represented to be.