Wednesday, February 23, 2011

Looking for a Small Business Acquisition Loan?

Five Key Components to Include in Your Planning…
Qualifying for a small business acquisition loan can be quite an ordeal to say the least. If the business being sold is not making money or demonstrates significant variances over previous three years, lenders can be difficult to find even if the underlying assets being acquired are worth substantially more than the purchase price. Here are 5 major challenges you'll typically have to manage to secure a small business acquisition loan.

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 otherwise indicated in the purchase and sale agreement. The fact is potential business liability is a difficult thing to evaluate. This can create a higher perceived risk when considering a small business acquisition loan application related to a share purchase.

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 potential future profit the business is expected to generate beyond the current value of the assets. The challenge becomes determining what time frame is appropriate for future profit.

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. Or this requires some financing from the vendor in the form of a vendor loan. Vendor support and Vendor loans are 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 was 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:

New Owner Transition Risk
Will the new owner be able to run the business as well as the previous owner? Will the customers continue to 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. A proforma that does not reflect some form of decline would normally raise a few eyebrows.

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. This growth opportunity must be supported by realistic models based on market intelligence and real life data, not simply gut feelings.

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

Market Factors/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:
1) A sustained cash flow will obviously allow a smoother process of repayment.
2) A strong going concern business has a higher probability of future “sellability.”

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.

Why is your Personal Net Worth so Important?
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. This is over and above what the business is worth on its own merit. The business has to support its own credit facilities.

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.

Strategically You Can Prepare
To prepare for a possible transaction, the prudent Buyer will begin the process of fund raising “with the end result in mind”. This requires research, preparation, and developing relationships with potential funders prior to executing a transaction.

The MAXIMA Divestitures Group Inc. can assist you. We have resources and models to help you identify your credit suitability, model your personal financial snap shot with net worth summaries, and prepare for your credit discussions.


At which point our team members and systems can help you model your target acquisitions financial strengths, weaknesses, opportunities, and risk factors. We also provide Charter Business Valuation reports to support your business case.

This is one area where solid preparation pays dividends and enables your dream to own a business.

Wednesday, February 9, 2011

Current Alberta Economic Activity and Influencers

ATB Financial Economic Bulletin – Todd Hirsch, Dan Summer, Will Van’t Veld

This is an informative and easy to follow update on:
  1. Economic Leading Indicators (some good news here).
  1. Real impact of Retail Spending.
  2. What are Wholesale Trading levels in Alberta?
  3. Bank of Canada Monetary Policy update – what interest rates will impact you?
  4. Mortgage trends and the new qualification requirements.

Well worth the few minutes to confirm what you are feeling about the Alberta economy.

Link to article (will open a pdf document in your browser):

Friday, February 4, 2011

Keeping the Owner of the Business on as a Consultant When Buying a Business

Questions from Venture Magazine to the MAXIMA Group:
For the prospective buyer of a business, the decision to retain or refuse the services of the current owner as a consultant is one that should be carefully considered. Why part ways with the guy who established a well-functioning, profitable business? He may be the one with all the business contacts and relationships you’ll need to succeed. But what will that relationship look like? Will the owner be comfortable in the new role? Will he be co-operative? How much do you have to “give” to that relationship and how much do you get to “take”? Overall, the transaction involves much more than money. It’s about personalities and emotions, as well as practicalities.  

MAXIMA's Reply: A positive working relationship with the Buyer and Seller would include considering each of the related stakeholders and their priorities:
1. Staff
2. Clients
3. Suppliers
4. Bank
5. Landlord
6. Sellers exit plans and time lines
7. Buyers strategic plan for buying the business

These priorities should be considered within the negotiations process as one of the building blocks for a successful deal. Sharing expectations of this critical role after the deal has been finalized can be viewed as an additional grab by the buyer and could challenge the working relationship going forward.

The majority of deals require the Owner to stay on for a period of time except in case where existing team members take over (i.e.: Management Buyout). While there is no specific matrix to calculate the duration of the exiting relationship, typically the “Work Agreement” time frames are driven by complexity of operations, relationships involved, how well the company is positioned to perform without the owners involvement, and how well the Seller has developed the product and service offerings to consistently meet market expectations. Typically the larger the company, the better the processes and less hands on required by the owner. With smaller companies the owner may be the drive gear that keeps everything working.

Different Buyers have different priorities:
• A newbie Buyer to the Sellers marketplace will want the time to confirm everything from “how” and “what” to “who” and “for how much” “from where” and “for how long.” This requires time and access to the knowledge base.
• Even a Buyer experienced in the company’s products and services will want to be comfortable with the company’s offerings and reason why clients are loyal. The challenge is there is no easy way to transfer the history of all the relationships, history, and experience.
• Typically the hidden asset in a sale; staff, suppliers, alliances, customers, and even the bank will need time to evaluate and measure the impact of the “new guy”. It is common to somehow link the Vendor financing to some kind of “work out” term. No Buyer wants their new opportunity to crash and burn because somewhere someone stops doing what they should be doing or starts changing the “secret herbs and spices” that made the transaction worthwhile in the first place. The ideal position for the Buyer is where the Seller has some form of vested interest in future continuity of the business. While the terms of the financial structure are negotiated in the structure of the deal, Seller participation provides a confidence factor to the Buyer (and the Funders) when the Seller is willing to remain in some role going forward. How much is this worth to the Buyer when this role demonstrates to all the stakeholders the business is “running steady as she goes”?

Things to remember:
1. Buyer and Seller should strike a fair deal to allow for a mutually acceptable working relationship going forward. Whether justified or not, an unhappy Seller typically has a lot of influence with all the stakeholders at the table.
2. Suppliers will use their historical relationship with the Seller to discuss the merits of the Buyer and what they might expect from their future working relationship.
3. Staff will meet off site with Seller and ask questions like what kind of future do they have with the new guy, or ask for the Sellers impressions on the new guy. That Sellers opinion can have a big impact on whether the staff stay or take the opportunity to refresh their career path. When they leave so do the contacts, history and bits and pieces of a system that worked well enough to justify buying.
4. The bank will often get a first impression and verify it with a conversation with the Seller where they measure the Sellers experience and impressions so far.
5. Many of the stakeholders will be looking for a “nod” from the Seller whom they may have worked with for years.
6. Alliances or product suppliers in a Distributor situation often have clauses where they have the right to veto or terminate future supply based on their comfort level with the Buyer. Part of this will typically include a private conversation with the Seller whom they have history and probably a trust.
7. While review of the Top clients is always a consideration in the valuation and negotiation process, it is definitely in the Buyers interest to ensure continuity as these relationships carry a heavy weight in the future. A Buyer needs time to develop some of their own track record with the top clients. Typically a positive relationship with the Seller helps ensure the baton passes seamlessly.

All of these potential stakeholders’ opinions warrant including a strategic plan for how the Seller will assist the Buyer through the transition process. Typically good planning should include some form of “fit for purpose” role for some time frame for the Seller. The truth is the Seller knows more about that business, the people, and the history than any outside consultant ever will. The access to that information requires the relationship to be based on a degree of trust and integrity. Every Buyer has to decide how much that is worth to the deal going forward. While every business model is unique, the expectations from both sides should to be included in the negotiations and legal papering of the deal, not after the fact. This clear agreement of expectations between the Buyer and the Seller should assist the “changing of the guard” to be appropriately managed.

Performance expectations to be addressed in some form:
 a) Role / title / and how presented to all stakeholders.
b) Clearly identify what knowledge to be transferred and how this will be managed.
c) Clearly model how internal day to day functions of Seller will be transferred over to the new leadership.
d) Hours of work.
e) Meetings expected to attend.
f) Introductions to key stakeholders with clear agreement of what will be covered.
g) Introduction to bank relationship even if Buyer intends to change.
h) Wind down schedule for Seller to include the milestones required to meet all the expectations.

Financial compensation:
a) Strategically the basic Work Agreement should be framed in negotiations process with compensation for the Sellers work out term as part of the building blocks of a fair deal.
b) Rate of pay; which is usually tied into how milestones are achieved. Typically we see full time for a period, down to a few days per week for appropriate term, then one day a week, then formal exit, then only occasional special functions i.e.: senior employee retire etc.
c) This is generally easiest to manage when the structure of the deal somehow relates performance of company to compensation. i.e.: Maintain or exceed the same volume with Top 10 Clients for a year would allow for some form of bonus at end of term.

In the end the Buyer wants to have bought a company that meets and exceeds previous performance history. What could possibly go wrong with this? The fact is every Buyer eventually thinks they are smarter than the Seller. Every Seller has a very high opinion of the value of their experience and business savvy. During the negotiation process the expectations should identify what expectations were mutually agreed as realistic. This is where common sense should reign and allows both parties to develop a sense for whether or not they can work together. When either party is operating with a great deal of personal restraint in order to get the deal done, it makes no sense to stay working together for one minute longer than required to pass the baton.

On the other side of the coin, we have seen over confident Buyers who decide “how hard can it be” only to find out the value of business is declining everyday as staff leave or Clients decide to test other service providers, or all the energy is going into solving new problems rather than maintaining course long enough learn what it takes to really get the job done. In cases where the role and expectations are not clear or simply tied to time (i.e.: 12 months) the opportunity for frustration and challenges to the business can escalate dramatically.
a) While Seller knows he has cashed the cheque so the business is sold, having the Seller involved at the same level as prior to sale, can trigger many opportunities to conflict with Buyers ideas of how operations or decisions should be made.
b) In some cases the Seller has been mandated to “run” business as usual. In most cases the real purpose of having that Seller around is to allow the Buyer to identify the critical dots to be connected and assist in managing any damage control required for the stakeholders.
c) If the Buyers goal is to work together to insure the best knowledge transfer and have the Buyer take full reigns as soon as possible, at some point the situations start repeating themselves and two decision makers are redundant. Both parties should agree how to address that before it becomes a problem.
d) In most cases the Sellers world has significantly changed. While he was responsible for the business outcome for years, now he has “the money” and it is a whole new world. If the expectations were not discussed early in the negotiation process any new suggestions of “we need you to do this or that” can lead to significant disagreements and frustrations.
e) While the Seller is on their way out anyway, the fact is a lot of the stakeholders have some form of loyalty to the Seller. Few people, including the Seller have the discipline to keep their opinions to themselves, so now everyone is hearing bits and pieces from the disgruntled Seller... and the Buyer is focusing on damage control instead of running the business. Keeping them on or cutting them loose? Answer: This should be a deliberate and integral component of the strategic planning in the negotiation of the deal... or leave this to the end only to find the consequences more painful than the process.