As was the case last year, COVID-related federal stimulus benefits are expected to be a powerful catalyst driving deal activity in 2021.
On December 27, 2020, Congress passed the Consolidated Appropriations Act, 2021, a $2.3 trillion stimulus bill, with $900 billion targeted specifically for COVID-19 relief. A portion of these funds will be used to extend the popular 2020 CARES Act SBA Debt Relief program.
According to Rich Jackim, Managing Partner of Sports Club Advisors, the extension includes significant benefits that provide buyers with powerful incentives to acquire a business in 2021, including:
- Six months of payment forgiveness for SBA 7(a) loans closed after February 1, 2021, and before September 30th, 2021. This includes principal and interest up to a maximum of $9,000 per month. That’s a $54,000 benefit to buyers.
- The SBA will waive the guaranty fee that must be paid by borrowers. This fee is typically around 3% of the loan amount and will now be zero for loans closed before September 30th, 2021. That’s an average saving to buyers of approximately $4,500.
- The SBA is increasing the amount of loan guarantees to lenders from 75% to 90%. This will decrease the risk to lenders and help ensure liquidity for deal financing.
Jackim urges buyers who want to take advantage of the extension to learn from the mad rush to meet last year’s deadline. It required tremendous coordination between sellers, buyers, counsel, intermediaries, and lenders. “The lesson buyers learned last year is not to procrastinate and try to close at least 30 days before the deadline to accommodate potential delays,” says Jackim.
What does this mean for sellers? If you are thinking of selling your business, now may be the right time, despite the pandemic. In addition to record low interest rates, the SBA Payment Forgiveness Program provides buyers with extremely low financing costs. Last year we sold two businesses for over asking price because the buyers were able to afford to pay more due to the 2020 SBA Payment Forgiveness Program. Once the pandemic is under control, it is unlikely buyers will have access to the same generous funding they have today.
To learn more about taking advantage of the 2021 SBA Payment Forgiveness Program contact Rich Jackim at 224-513-5142 or at email@example.com.Read More
The first face-to-face meeting between a buyer and seller is one of those “make or break” meetings. The best way to prepare for it is to think of this meeting like a first date. The dynamics are very similar. You’ve spoken on the phone and you’ve emailed. Now there is enough interest that you both want to meet. Like a first date, the goal here is to get to know each other but, I recommend you do the following three things to ensure this meeting goes as well as possible.
Preparation means three things. First, have a plan for the meeting. Where will you meet? When will you meet, during business hours or after hours? Who do you want to attend from your side? Do you want to have handouts or a formal presentation? Will you be serving refreshments or snacks? Do you know who the buyer is bringing to the meeting? Will you give the buyer a tour of your business? Does the business show well or do you need to do a little housekeeping before buyers visit? Does it make sense to give buyers samples of what you make or sell?
You should determine these things, not the buyer. Once you have a plan send your plan to your buyer. Buyers need to understand how your sales process works and what is expected of them during each step of the process.
Determine your Desired Outcomes Ahead of Time
The primary goal of this initial meeting is to show the buyer that everything you said about your business in the offering memorandum was accurate so they have enough confidence in you and your business to submit a purchase offer or Letter of Intent (LOI) to buy your business. However, you may also have several other goals as well. Below is a list of some typical secondary goals.
- Confirm the buyer’s financial qualifications by asking questions like how much money he had available to invest, what is the source of these funds, where is the buyer in discussions with potential lenders, what is the buyer’s credit score, etc.
- Confirm the buyer’s business experience by asking questions like, tell me about the other businesses you’ve owned, or tell me about your previous business management experience.
- Confirm the buyer’s interest in your business by asking them what they think about your business, how does it compare to other businesses they’ve looked at, does it fit what they were looking for?
- Assess the buyer’s character. It’s important that you sell your business to someone you like, respect, and admire. Chances are if you like the buyer, so will your employees and customers. Trust your gut. If something doesn’t feel right about the buyer, it probably isn’t
- Determine the buyer’s timeline. Business brokers are fond of saying “Time Kills All Deals” and it’s true. Another important goal is to determine how quickly a buyer is prepared to move and to determine if their timeline and your timeline line up.
Have an Agenda
Preparing an agenda ahead of time will help ensure that you accomplish your goals for the meeting. A sample agenda for a successful buyer meeting might look like this.
- Introductions & Welcomes – 10 minutes
- Buyer Background. Ask Buyer to describe their background, experience and why they are looking to buy a business – 10-15 minutes
- Seller Background. The seller describes how the seller got into the business and why they are exiting – 10-15 minutes
- Business Update. The seller gives the buyer a summary of how the business has performed since the offering memorandum was prepared and provides the buyer with a current year-to-date P&L statement. 10 minutes.
- Q&A. Seller to answer any questions the buyer has. 15-30 minutes
- Tour. Give the buyer a tour of the business and continue to answer questions throughout the tour. 15-30 minutes.
- Buyer Feedback. Return to your office or conference room and ask the buyer what they think. Discuss what they like and what they didn’t like. Get a list of any additional information the buyer would like from you.10-15 minutes.
- Next Steps/Action Items. Tell the buyer what your timeline is and if they are interested, the next step is for them to submit an offer or Letter of Intent. Determine if they plan to submit an LOI and if so, when they plan to do it. 10-15 minutes.
Of course, this is just a suggestion. Feel free to modify it to suit your particular situation. However, please note that the entire meeting is designed to last between 1 1/2 and 2 1/2 hours. Try to keep the meeting to around 2-3 hours, max. Sometimes, the chemistry between a buyer and seller is great and the conversation can continue for four or five hours, but I don’t recommend it. If that’s the case, I recommend scheduling a second meeting rather then let the first meeting go for more than three hours.
Asking and Answering Questions
Now that you have an agenda, the next steps if to prepare a list of questions you want to ask the buyer. Keep this with you during the meeting as a reference so you don’t forget any of your questions.
When responding to a buyer’s questions, try to only answer the question asked. It’s best to keep your answers factual and not share long war stories or go off on tangents about things the buyer didn’t ask about. For example, if a buyer asks what are your Average Days Receivable is, just answer the question. Don’t tell a story about the one customer who refuses to pay within 30 days, and often stretches you out to 190 days, so you told him he now needs to pay in full when he places an order.
Building a Positive Relationship
It goes without saying that you should do everything possible to keep the meeting polite and respectful and to avoid any discussion about politics or religion, which often can be hot points.
Nothing builds a more positive relationship than truth, so make sure that all of your answers are truthful, accurate, and complete. While you are trying to sell your business, you don’t want to come across as a salesperson. Let y our business sell itself. The best way to do that is to as real and as honest as possible.
For example, if a buyer asks who your competitors are be truthful. Every business has some level of competition. So don’t pretend that your company has no competition. This will simply make the buyer skeptical and make him wonder what else you may be fibbing about.
One last word of advice. Be sure to do your homework on the buyer ahead of time by asking the buyer to send you a copy of the buyer’s resume before your meeting. That way, you can do a Google search on the buyer and the companies he’s owned or worked for so you can assess during your meeting how truthful the buyer is being with you.
If you follow this advice, you will greatly increase the odds that your first meeting with a buyer will accomplish all of your objectives.Read More
Sellers generally desire all-cash transactions; however, oftentimes partial seller financing is necessary in typical middle market company transactions. Furthermore, sellers who demand all-cash deals typically receive a lower purchase price than they would have if the deal were structured differently.
Although buyers may be able to pay all-cash at closing, they often want to structure a deal where the seller has left some portion of the price on the table, either in the form of a note or an earnout. Deferring some of the owner’s remuneration from the transaction will provide leverage in the event that the owner has misrepresented the business. An earnout is a mechanism to provide payment based on future performance. Acquirers like to suggest that, if the business is as it is represented, there should be no problem with this type of payout. The owner’s retort is that he or she knows the business is sound under his or her management but does not know whether the buyer will be as successful in operating the business.
Moreover, the owner has taken the business risk while owning the business; why would he or she continue to be at risk with someone else at the helm? Nevertheless, there are circumstances in which an earnout can be quite useful in recognizing full value and consummating a transaction. For example, suppose that a company had spent three years and vast sums developing a new product and had just launched the product at the time of a sale. A certain value could be arrived at for the current business, and an earnout could be structured to compensate the owner for the effort and expense of developing the new product if and when the sales of the new product materialize. Under this scenario, everyone wins.
The terms of the deal are extremely important to both parties involved in the transaction. Many times the buyers and sellers, and their advisors, are in agreement with all the terms of the transaction, except for the price. Although the variance on price may seem to be a “deal killer,” the price gap can often be resolved so that both parties can move forward to complete the transaction.
Listed below are some suggestions on how to bridge the price gap:
- If the real estate was originally included in the deal, the seller may choose to rent the premise to the acquirer rather than sell it outright. This will decrease the price of the transaction by the value of the real estate. The buyer might also choose to pay higher rent in order to decrease the “goodwill” portion of the sale. The seller may choose to retain the title to certain machinery and equipment and lease it back to the buyer.
- The purchaser can acquire less than 100% of the company initially and have the option to buy the remaining interest in the future. For example, a buyer could purchase 70% of the seller’s stock with an option to acquire an additional 10% a year for three years based on a predetermined formula. The seller will enjoy 30% of the profits plus a multiple of the earnings at the end of the period. The buyer will be able to complete the transaction in a two-step process, making the purchase easier to accomplish. The seller may also have a “put” which will force the buyer to purchase the remaining 30% at some future date.
- A subsidiary can be created for the fastest growing portion of the business being acquired. The buyer and seller can then share 50/50 in the part of the business that was “spun-off” until the original transaction is paid off.
- A royalty can be structured based on revenue, gross margins, EBIT, or EBITDA. This is usually easier to structure than an earnout.
- Certain assets, such as automobiles or non-business-related real estate, can be carved out of the sale to reduce the actual purchase price.
Although the above suggestions will not solve all of the pricing gap problems, they may lead the participants in the necessary direction to resolve them. The ability to structure successful transactions that satisfy both buyer and seller requires an immense amount of time, skill, experience, and most of all – imagination.
The post Negotiating the Price Gap Between Buyers and Sellers appeared first on Deal Studio – Automate, accelerate and elevate your deal making.
As part of the $2.2 trillion CARES Act, the SBA is now offering to make six months of payments on SBA loans, including both principal and interest.
This partial payment program is part of the SBA’s flagship 7a loan program and applies to both existing SBA loans as well as new SBA loans that are closed before September 27th, 2020. SBA lenders, the public stock market, and businesses of all sizes recognize that a significant disruption has occurred in their business activities. The SBA is paying six months of payments for current SBA borrowers to relieve stress on business owners and attempting to “keep our small businesses going.” It is important to note that this is not a payment deferment plan, instead, the SBA will actually make payments of principal and interest for buyers.
If you are a potential buyer of a fitness center or studio, it’s important to consider the following:
- This is a temporary economic incident. There is no fundamental economic weakness.
- There is lots of liquidity in the finance and banking sectors, this is not a repeat of the 2008 financial crisis.
- Interest rates are at an all-time low and are unlikely to go up soon. As of mid-April, the interest rate for a 10-year SBA 7a business acquisition loan was 6%.
- Many small businesses, including fitness centers and studios, may benefit from pent up demand.
- Fitness centers and studios that were overpriced at the end of 2019 will be repriced to reflect current market conditions.
- Many fitness studios may see a decrease in wage costs as the unemployment rate increase and workers look for new employment.
- Now is not the time for inexperienced entrepreneurs to be getting into the fitness industry.
- Lenders are willing to back buyers with strong operating track records, a solid personal balance sheet, and a clear vision about how they will be able to rebuild sales and pay down debt in a post-Coronavirus economy.
- Even though the SBA will be making the payments for the first six months on newly originated loans, lenders can not take that into the credit decision. To qualify for the program, the cash flow of the fitness center or studio must be able to support the loan payment without taking into account the SBA payments.
- Lenders are willing to take into account the impact the Coronavirus has had on the business when valuing a business, but buyers must demonstrate a clear and realistic plan to get cash flow back to pre-pandemic levels.
- Certain fitness centers and studios, especially those who were able to quickly transition to a virtual model, may be especially attractive candidates for this program right now because they were not as severely impacted by the pandemic as other businesses.
If you are interested in taking advantage of this program, keep in mind that deals must be closed by September 27, 2020, to qualify. So, working backward, you may want to keep the following timeline in mind:
- Sign letter of intent – May 15th
- Complete Buyer’s Due Diligence – June 1st
- Secure Lender’s Financing Proposal – June 15th
- Lender Submits Loan to Underwriting – June 30th
- Lender Underwriting Completed – July 31th
- Purchase Agreement Completed – August 28th
- Target Closing Date – September 1st
- Fall-back Closing Date – September 15th
- Drop Dead Closing Date – September 27th
For additional information about this unique SBA loan payment program, visit the BizBuySell Financing Resource Center or contact Richard Jackim at 224-513-5142 or at firstname.lastname@example.org.Read More