Post by MeMyselfandI on Aug 7, 2019 12:48:53 GMT -5
The owner of my company wants to retire in a few years and is looking to sell and transition out. We're a small business, less than 30 people. I've been entertaining the thought for the last several years but now that the reality is upon us, I'm more seriously considering it. I'm not sure of the cost, but our sister company was sold for $1.5 million two years ago. We have more business and more assets than they do, so I'm thinking at least double. Am I crazy? What should I be looking for? And I am researching, but where could I get decent business loans? What questions would you be asking?
You can get a business loan, but you’ll need to bring substantial equity to the table and likely be required to personally guarantee the note. The bank will want to see that existing cash flows from the historical business can comfortably debt service the loan, so that will probably be one of the guiding factors on how big of a loan you may qualify for.
How was the prior sale handled? Did the company use a banker or was it a similar process where the company was sold to a person/people known to the owner?
You’ll need full access to financials to determine what you’re really buying and want someone to guide you on the form the purchase will take (stock v asset sale).
Most banks do this type of financing. You’ll be better off if you can get a referral to a lender from your CPA or an attorney, but it’s not always necessary. (Disclaimer: I do commercial lending and am very weary of cold calls into the bank for a loan)
I bought a 5% share of my firm within the last couple years, and the plan is for me (and two other partners) to continue to buy more until we've eventually bought out the founding partners, facilitating their retirement. It's a much longer term plan than just oh hey, the founders want to retire in a couple years! It would not be financially tenable for the 3 of us "next gen" partners to buy out the 2 founders completely in only a couple years.
I put 30% down and borrowed the remaining 70% from the firm itself at 5% interest. I have the loan about halfway paid off at this point, and hope to pay it off within 2 years. Then theoretically we do another 5% round. Valuation of the firm or business is the hardest, most contentious part.
Several years ago, I nearly bought a smaller business. I would have still needed a loan, so I did a lot of research on that.
I would find yourself a good small business loan officer. He/she will be worth their weight in gold. You’ll need to prepare your personal financial statements. You’ll need help from a CPA to value the business now and to look over their books to ensure everything is good. You’ll also need to prepare a business plan. Loans and down payments will vary- I think there was a smaller % downpayment on the building vs the “business” (all other assets). It is a pretty long process (several months at a minimum) to do all this (I have a relative currently buying a $1M business and I’m helping him a bit). Good luck!
My brother had been considering buying the company he worked for and the owner came to him with a very explicit offer. The way his offer was strucrured was a multi year payoff using the expected profits. He also spoke to an attorney who advised him on things like buying assests vs. the business than he's absolved of future liabilies, etc. In helping him research this, I came across this podcast - "Life After Business" which talks about this - it was interesting to listen to in general, plus gave me things to tell him to consider. Good Luck!
Post by crystald528 on Aug 8, 2019 11:55:21 GMT -5
I work in a profession that includes some of this work. I would be sure to look at local and regional resources that might include business loans and revolving loan funds. Look at the state Department of Economic Development and other federal resources. I work in a rural state that provides incentives for job creation/retention.
MeMyselfandI , My husband and I acquired a business from the founder last year. It was an established business that he had founded 30 yrs prior; he had significant health issues and was looking to retire. We had no involvement in the business before hand, so our experience was a bit different since you are already involved in the business and know a good bit I would assume about its inner workings. We were looking for a business to purchase and run vs. starting from ground zero ourselves. We were looking for a business operating below its potential that had some problems, but good overall bones. Something we can improve and resell in 5-10 yrs.
We went through due diligence on a handful of businesses for sale from the full range of **POUF** (PDQ, will delete later) before we found the right deal. You will absolutely want a good business loan officer and lawyer. We did the financial evaluation and due diligence ourselves (definitely the time when our MBAs have come in the most handy). It was a super interesting process and we learned a ton. The banks will want to see that the business is profitable and can support itself. They will also want an analysis of factors to change (do you need to move physical locations, will cost structure or employees change dramatically, etc.) in order to prove ongoing sustainability.
This was all new to us and we honestly didn't know if a bank would lend to us. In the end, we were able to get an SBA loan **POUF**. We also took out a line of credit to get us through the first while of all expenses and no income as things moved over, in addition to a large move to a new location. Navigating all of this is where a good banker comes in handy, definitely get referrals from friends/contacts as we found many banks unfamiliar with the SBA process. Ultimately financing was quite easy for us b/c the business was profitable, our loan was reasonably small, and I kept my day job which covers all of our family expenses so we didn't need to draw an income off the business. Loans are even easier (with more attractive terms/rates) if the purchase includes real estate (ours did not). And pp brings up a good point about purchasing the assets of the business vs. the actual business. Consult with a lawyer on that.
In addition to bank financing we also had the seller finance x% of the sale price on a 5 year note. This is standard for SBA loans as it incentivizes them to give you a smooth handoff. He also had to consult for 6 months (12 months is max SBA allows) again in order to ensure a smooth transition of ownership.
It has been a wild ride but great experience overall. It is no quick turn between researching, LOI and due diligence, re-negotiations based upon what you find, and the loan/closing process. All-in it took us 5+ months, however our sellers were also slow. This got long but feel free to PM me if you have more questions.