SBA Lenders Offer Advice on Getting Loans Approved
SBA lenders Kim Eells, Cheryl Beer and Susan Kite presented at the April GABB meeting.
If you want to get an SBA loan to buy or sell a business, get the information to lenders early, be honest up front about potential problems, and expect to pledge assets, including a home, to secure the loan.
That advice highlighted the presentation by veteran SBA lenders to the Georgia Association of Business Brokers on April 26.
Bob Smith of HealthMarkets.com was the breakfast sponsor.
The program was presented by GABB Platinum Sponsor Cheryl Beer, Vice President of SBA Lending at the Piedmont Bank; Susan Kite, SVP and Managing Director of SBA Lending at Signature Bank ; and Kim Eells, Vice President, Business Development Officer of the Brand Bank.
GABB SBA Power Point Presentation
SBA Loan Program Overview
- SBA 7(a) – $5,000,000 maximum loan amount
- Small by SBA Size Standards
- Operating Company must be “For Profit”
- 15X Debt Service Coverage, “DSC” (including all affiliates)
The SBA 7(a) program has a $5 million maximum, with 1.15 x debt service coverage, and operating company must be for profit.
Equity injection: minimum usually 20%, but other factors may affect the percentage, including cash flow, collateral and experience.
The maximum term of the loan is 10 years for purchase of a business only, 25 years for real estate, and a weighted average for combined business and real estate.
The maximum rate for the loan is prime plus 2.75%
Collateral required includes business assets and personal assets of guarantors.
SOP rules:
- The buyer must purchase 100% of the ownership interest in the business;
- The seller cannot remain an officer, director, stockholder or key employee of the business. If a short transitional period is needed, the small business may contract with the seller as a consultant for a period not to exceed twelve months;
- If the purchase price of a business includes intangible assets in excess of $500,000, the borrower and/or seller must provide a combined equity injection of at least 25% of the purchase price of the business. In order for the seller financing to qualify as equity injection, the seller note must be on full standby of principal and interest payments for a minimum of two years. If the total “equity” is greater than 25%, there can be two seller notes. For example, if the buyer has 20% equity and the seller provides 20% seller financing, there can be two seller notes, one for 5% on full standby for two years and one for 15% with immediate P+I payments;
- If there is business real estate as part of the change of ownership, the real estate cannot be financed separately by a non-SBA guaranteed loan (unless it is an SBA 504 project) to avoid the 25% cash injection;
- The lender must obtain a current business valuation from an independent third party chosen by the Bank to justify the purchase price.
How to get your loans approved quickly
- Get Seller Information as quickly as possible after signing listing agreement
- Last 3 years tax returns (if sole proprietor, get Schedule C)
- YTD interim statement to include Balance Sheet & Income Statement
- Previous year’s interim statement of same period
- Agings of Accounts Receivable and of Accounts Payable
- Listing of all assets being sold – and their market value (with serial numbers for any asset valued at $5,000 or more)
- 4506-T, properly signed
- Letter of Intent or Purchase Agreement
- Manage Seller expectations
- They will likely have to take a Seller Note of 10% to 15% of sales price
- They will need to update Interim Financials and Agings to keep them current (every 60 – 90 days)
Buyer Info
- Get Buyer information as soon as possible
- Last 3 Years Tax Returns – Personal and Affiliate
- Recent Personal Financial Statement – give them form 413
- Business Plan (good template is at sba.gov)
- Financial Projections (monthly for Year 1 / Annually for Years 1-3)
- Manage Buyer expectations
- They will have to put in cash equity of 10% to 25% of sales price
- They may have to pledge their home or other real estate
- They will need to assign us life insurance
- If your buyer has ever been arrested, they need to tell us early so we can get them cleared and processed
- The loan process is not like buying a home – it may take longer than they expect.
Lender Info
- Use a lender that knows business acquisition SOP rules
- Get with us early and use us as a resource
- Realize that to us, DSC is more important than SDI
- Have your Seller and/or Buyer prepared
- with an organized application package
- with realistic expectations about the loan process
- The process will be much faster when information is provided quickly when asked
The Panelists also discussed three examples of loans they encountered.
Example 1:
30 year old niche therapy practice that provides occupational therapy, physical therapy and Speech-Language therapy to school systems.
Buyer has owned a business in home health care.
Total Project Costs of $1,950M included Intangible Assets of $1,600M, Working Capital of $300M, Closing Costs including SBA Guaranty Fee of $50M – Seller Financing of $350M, Buyer’s Cash $100M – SBA Loan $1,500M
Only collateral was a 2nd lien on personal residence.
Example 2:
35-year old Commercial Landscaping company – 3 owners in 60s and retiring. Sales price of $1,605,000 included property, trucks, goodwill. Property valued at $600,000 assets valued at $280,000 with $805,000 goodwill. 2 loans: Building loan at P+2.5% for 25 years and business acquisition at P+2.75% for 10 years with 6-months interest-only for both. Financing structure: $540,000-property, $448,000-business and assets, $136,000-working capital and closing costs, $263,000 – borrower cash, and $360,000 seller note. Buyer was ready to close with out-of-state lender when his partner pulled out, changing deal. We closed 35 days after being notified that the buyer wanted us to consider the deal.
Example 3:
distributor of parts for communications companies that service cell phone towers.
Two husband/wife teams with varied sales and management experience
Total $1,211 included $918 GW, seller 225, equity $269, loan $717, 10 years, P + 2.5, $100 Capline
Collateral included personal assets of Guarantors
Why Loan Applications Get Rejected
Delinquent credit history – 650 minimum score
SBA eligibility issues
- 912 issues
- Presently under indictment, parole or probation
- Ever been charged with and or arrested for any criminal offense other than a minor motor vehicle violation? Include offenses which have been dismissed, discharged or not prosecuted.
- Ever been convicted, placed on pretrial diversion, or placed on any form of probation, including adjudication withheld pending probation for any criminal offense other than a minor vehicle violation?
- Not citizen or permanent resident
- Problems with Franchisor
- SBA failure rate for franchise
- Franchisor has reputation for not supporting its franchisees
- Talk to other franchisees
- Talk to financial institutions who have financed particular franchise
- Unrealistic projections
- Use financial advisor to prepare business plan and projections
- Breakeven analysis
- Other issues
- Insufficient working capital and equity
- Additional support
- Spousal income
- Strong franchisor support
- Strong location
- Strong credit history
- Liquidity
- Management experience
Finally, if you get turned down by a Bank, ask for the reason. The information may help you with another lender or for your next request
Contact information for presenters:
Susan Kite
404-256-7734
Kim Eells
770-339-2088
Cheryl Beer
678-576-9392
Cheryl.beer@piedmontbankonline.com
Read MoreSix Ways Business Brokers Can Avoid Litigation
GABB member Lawrence Domenico, an experienced litigator, spoke to the Georgia Association of Business Brokers about how you can avoid litigation. Here’s what he had to say:
For you guys as Business Brokers, it almost always is better to avoid litigation if you can. Courts and Arbitration proceedings take a long time to complete and lawyers are expensive. The quickest you can expect to have a trial in Fulton County is a year after you file suit. Most business cases take several years. Moreover, there are lots of lawyers out there who are very happy to litigate to the death.
Before I tell you how to avoid litigation, please keep in mind, I don’t see most deals of business brokers because most go through to closing or the listing expires without success.
I only see the matters where brokers contact me because something is wrong with the listing.
It is probably not possible to never have a problem listing. There is a percentage of people that you cannot please and you will be in conflict them.
There are people that do not care about living up to their obligations, be it in a contract or otherwise.
These are often the same folks who have a tenuous grasp on reality and have a hard time telling the truth.
But there is good news, because these kinds of people exist, I will always have work to do.
What I would like to help you all with today is not dealing with these folks that I have just described. You will either have to sue those folks or walk away from them.
What I want to help you with today is minimizing the number of times you have to sue folks who have a grasp of reality, who generally do respect their obligations, but for some reason or another don’t see things the way you see them.
I have 6 recommendations for you to avoid litigation.
- First, avoid these problem clients. Easier said than done, I know, but I think you already know how to spot these people. First and most importantly, trust your gut. Call it instinct or experience or karma, whatever, when you have a bad feeling about working with a client, you are probably right. Almost all my clients say at some point, “You know, I had a bad feeling about this guy way back when, but I went ahead with the engagement.”
In my own practice, I know this is true. The greatest regrets and biggest losses of money in my practice were when I blindly trusted a client, or thought they would change once they saw how sincere and diligent I worked for them, or got blinded by the potential fee.
If your gut is not warning you about a client, there are still things you need to do to avoid problems.
Ask yourself, what do you really know about new client?
Sometimes the concern is not so much stealing money from you as wasting your time. A referral is the best, in my experience
This is true for hiring help, too. I far prefer to hire someone already known to me or someone at my firm. I always ask, “Are they crazy?” If not, you are way ahead.
Other options: make a personal visit to business; Google them; D&B; check references.
What do you know about the business? Co-broker if you’re not comfortable with the business or your experience.
- Next, you must, must, must have a written listing agreement. Since the late Middle Ages, there has been a law called the Statute of Frauds that says certain contracts have to be in writing. Real estate contracts have to be in writing. Contracts which take more than a year to perform have to be in writing. So, if you want to sell a business, your listing agreement has to be in writing.
Don’t call me if you don’t have a listing agreement. I won’t have anything to work with.
Use the GABB form listing agreement. If not that, at least look at it to see if there is something you should add or change in the form you use.
The listing agreement must be in writing. If the seller is hesitant to sign, that is another strong sign that you may have a problem client. You should think long and hard about continuing your efforts for that client.
Also, if the client only wants to sign a listing agreement in the name of the company, and not individually as an owner, that is another strong indication that you have a problem client. Most of the business sales I have ever seen are really asset sales. The selling company still exists after the sale, but it has no assets. If you have a listing agreement only signed by a company with no assets, you have a problem.
- Once you think you know something about the potential client, one of the best things you can do to avoid problem clients is to ask for a modest upfront fee. I know you guys typically get paid your fee at closing, but you do all your work before closing. If a client is not willing to pay you a small fee up front, and you can call it a marketing fee or an administrative fee or a listing fee, that is a strong indication that the client is going to be a problem going forward.
It’s the same in my business. If someone is not interested in paying me a retainer, that is a red flag.
- Include a minimum fee in your listing agreement. I have had a number of cases where the listing agreement said the fee was a percentage of the consideration paid at closing. But what if there was no closing? Most of the cases in which I represent business brokers are cases in which there was no closing. The seller withdrew the business from the market or sabotaged the sale. If you don’t have a minimum fee listed, and there is no closing, the judge or arbitrator is going to have a difficult time awarding you any damages.
Judges and lawyers are familiar with contingency fees. If you don’t have a minimum fee provision in your listing agreement, it is going to look like a contingency fee agreement to the judge or arbitrator.
- Put a mandatory arbitration clause in your listing agreement. Arbitration is slow and expensive. Litigation is painfully slow and painfully expensive.
In arbitration, you get a lawyer to make the decision as to who wins and who loses. In litigation, 12 people off the street make that decision. A jury is a crazy way to make decisions. In my humble opinion, juries make sense in criminal cases. They are a check on the government. But in a business case, I don’t think they make any sense. If you have ever interviewed jurors after a case, you would hear the most random explanations for why they made the decisions they did. Your jury may think $20,000 is a lot of money to award you for a year’s worth of work. Speak with an arbitrator after he or she makes a decision, and you’ll get a thoughtful, reasoned decision, even if you don’t agree with it.
- If you have a signed listing agreement, I encourage you to communicate regularly with your client. In my experience, clients don’t really understand what you do to market their business. Either through ignorance or willful ignorance, some clients think all you do is show up at closing to get a check. To fight against that ignorance, I recommend that you send regular letters or emails to the client detailing what you have been doing. Don’t go 3 months without communicating with your client. Regular updates to your client will not only combat the notion that you are not working for the client, it will be great evidence at a trial or a hearing if you end up in a dispute with the client.
Document your disputes. Lawyers are always asking clients whether they have anything in writing to document a dispute. I find that many people think that the kind of writing that lawyers are looking for is only a document that says Contract at the top of the page and is signed and notarized. That is not the case at all.
What is a “writing?” It can be a letter, or email, or a check. And here’s your tip of the day, confirm your agreement in a writing even without client’s signature. Send your client an email, “Jim, thanks for meeting with me today. I appreciate your promise to get me those financial statements by Monday. I’ll contact the buyers today and tell them the financial statements are on the way. As we discussed, this is one of the things you promised in our engagement agreement and if we don’t get those financial statements we cannot market your business.”
There is an assumption in the law that the recipient of a communication will respond if he or she does not agree with the communication.
This kind of email will give the judge, jury, or arbitrator a date, time, and the precise terms of the communication. It is not a “he said, she said” matter.
That’s my 6 recommendations. Probably not worth thousands of dollars. Don’t be afraid to call me or another lawyer before your relationship with the client has totally fallen apart. A good lawyer will tell you the good and the bad of your situation. Most times there are things you can do to save the situation. With counsel, you can make a bad situation better. And even if things fall apart, and you want to litigate, having a lawyer involved earlier will probably help you prepare your case for litigation which will increase your chances for winning.
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Don’t Want to Get Sued? Come to GABB on Tuesday, Feb. 23
Lawrence Domenico is the kind of lawyer you hire when you litigate, or sue someone. And he’s represented a lot of Georgia business brokers in disputes over the years.
On Tuesday, Feb. 23, Larry will offer advice worth hundreds, if not thousands, of dollars to members of the Georgia Association of Business Brokers and their guests. Namely, how NOT to need to hire Larry or someone like him. How to avoid legal disputes will be the topic of the GABB meeting on Feb. 23. The GABB, the state’s only professional association dedicating to buying and selling businesses and franchises, will meet at 10:30 a.m. at the South Terraces Conference Center, preceded at 9:45 a.m. by a free light breakfast and networking session. The South Terraces Conference Center is at 115 Perimeter Center Place, Atlanta, near Perimeter Mall. The meeting is open to the public at no charge.
Samantha Martin, SBA lending specialist with the Fifth Third Bank, is sponsoring the meeting.
Mr. Domenico is a managing partner of the law firm of Mozley, Finlayson & Loggins. He practices extensively in the areas of commercial and business litigation, products liability defense, and general litigation. Mr. Domenico also has extensive experience in assisting start up and existing businesses. In addition, Mr. Domenico has broad experience in alternate forms of dispute resolution including arbitration and mediation.
Mr. Domenico received a B.A., cum laude, from the University of the South in 1985. He attended the University of Georgia School of Law where he received a J.D., cum laude, in 1988. Mr. Domenico is a member of Phi Beta Kappa and Omicron Delta Kappa honorary fraternities. He belongs to the Atlanta and American Bar Associations, the State Bar of Georgia, and the Defense Research Institute. Mr. Domenico is active in a number of civic organizations and is a member of the 1995 class of Leadership DeKalb and the Rotary Club of Dunwoody.
The Georgia Association of Business Brokers (GABB) maintains a website that lists hundreds of businesses and franchises for sale throughout Georgia in a variety of fields, including automotive, business services, child care, cleaning, construction, electronics equipment, fitness, flooring, floral, food, gas stations, landscaping, manufacturing, medical, shipping, restaurants, retail, security, signs, and businesses related to the internet.
According to GABB President Greg DeFoor, selling a business is a complicated process with multiple steps and a lot of moving pieces.
“Our broker members are licensed business brokers, whereas everyone in the industry may not be properly licensed,” said DeFoor, who owns DeFoor Business Services, Inc. “GABB members benefit from continuing education, networking, promotion of professionalism and ethics in the industry, research tools, and forms prepared by a team of attorneys specifically for our association.”
“We are the go-to organization for business sales and acquisitions as a result of our dedication to the profession and our members being among the best in the state at what we do,” said DeFoor. “Our members have represented probably over a thousand transactions, and we have a dedicated membership of business brokers, lenders, attorneys and other professionals to assist business buyers and sellers at every step of the process. We work behind the scenes and go mostly unnoticed, but we’re an integral part of Georgia’s business community.”
For more information about GABB, email georgiabusinessbrokers@gmail.com or call 404-374-3990.
Read MoreA Buyer’s Quandary
Statistics reveal that out of about 15 would-be business buyers, only one will actually buy a business. It is important that potential sellers be knowledgeable on what buyers go through to actually become business owners. This is especially true for those who have started their own business or have forgotten what they went thorough prior to buying their business.
If a prospective business buyer is employed, he or she has to make the decision to leave that job and go into business for and by himself. There is also the financial commitment necessary to actually invest in a business and any subsequent loans that are a result of the purchase. The new owner will likely need to execute a lease or assume an existing one, which is another financial commitment. These financial obligations are almost always guaranteed personally by the new owner.
The prospective business owner must also be willing to make that “leap of faith” that is so necessary to becoming a business owner. There is also the matter of family and personal responsibilities. Business ownership, aside from being a large financial consideration, is very time consuming, especially for the new business owner.
All of these factors have to be weighed very carefully by anyone that is considering business ownership. Buyers should think carefully about the risks – and the rewards. Sellers should also put themselves in a buyer’s position. The services of a professional business broker or intermediary can help determine the relative pros and cons of the transaction.
Read MoreTop GABB Brokers in Oct. 27 Expert Panel
A panel of some of GABB’s most active and successful members highlighted the Oct. 27 GABB meeting. The panelists discussed issues that came up during or after due diligence that created a potential problem in getting the deal closed and how those issues were resolved. GABB President Greg DeFoor moderated the panel. Listen to a recording of the panel discussion here.
Panelists were:
Jeff Merry who has been GABB’s top producer in eight previous years, has been a part of the Million Dollar Club since its inception in 1999, and was honored with the GABB’s Phoenix Award denoting an individual who has earned Million Dollar Club status for 10 years. Jeff, owner and founder of the BUSINESS HOUSE, inc. of Gainesville, is a member of the International Association of Business Brokers. For more than two decades, his firm has specialized in serving the manufacturing, distribution, veterinary and medical industries. As a Business Intermediary, Certified Exit Planner and Consultant, Mr. Merry has been involved in more than 300 mergers and acquisitions that have ranged in acquisition price from $60,000 to more than $15 million. He has been an adjunct instructor for the MBA program at North Georgia College. Mr. Merry holds a Bachelor’s Degree from Mercer University, a Masters of Business Administration from the University of Illinois Edwardsville, and a Juris Doctorate from Atlanta Law School.
Kathryne Pusch, President of ConsultKAP, is a seasoned professional consultant and broker. She began her career consulting for a large international consulting firm in 1979. Since then, she has worked successfully within the framework of large corporations, and small enterprise, across a broad range of industries, private and public sector. Ms. Pusch has owned and managed two small businesses herself, in addition to her successful business enhancement, transitions, and brokerage practice. Her consulting work focuses primarily on preparing businesses for a successful sale, and exit and transition planning for owners. ConsultKAP intermediary services focus on helping individuals and companies who want to sell or acquire a business to do so with the greatest likelihood of success, as defined by the achievement of their unique objectives. Kathryne is the 2003 past President of GABB. She has a BS in Marketing and Marketing Research and an MBA. She serves on the Executive Advisory Network of the DBM International Center for Executive Options, is a published author, and a licensed Georgia real estate instructor.
Yasmine Jandali, owner and Managing Broker at Starwood Business Group, is the secretary of the Georgia Association of Business Brokers. Ms. Jandali founded Starwood Business Group in order to provide a boutique brokerage firm for clients seeking personalized service and specialized attention. As a certified Master Business Intermediary, she provides professional business intermediary services to both business sellers and buyers, including high-level business valuation services to business sellers. She has worked as a foreign exchange analyst at Wells Fargo, a marketing specialist at the Bank of America Corporation, vice president of Jandali Enterprises, Inc., and was managing broker and managing director of VR Business Brokers Mergers and Acquisitions. She has a B.A. in Business Administration Marketing from the McColl School of Business at Queens University of Charlotte, and also studied management at The Belk College of Business at University of North Carolina at Charlotte.
Eric Gagnon, former GABB president, became a Business Broker in 2001 after a successful career in the financial services industry for Bank of America, Bank of New York and KPMG. He founded We Sell Restaurants in the Atlanta marketplace. Mr. Gagnon is also a multi-year recipient of the GABB Million-Dollar Club recognition. Mr. Gagnon is a graduate of Francis Marion University and the University of Montreal. A frequent speaker and writer about the restaurant brokerage industry, he is co-author of the recently released book on restaurant brokerage, “Appetite for Acquisition.” Mr. Gagnon has been designated a Business Industry Expert by Business Brokerage Press and is a member of the International Business Brokers Association. He is a member of the Business Brokers of Florida (BBF), and is the preferred broker for Georgia Restaurant Consulting Group. Eric is a licensed Broker in both Georgia and Florida.
The meeting was held at 10:30 a.m. at the South Terraces Conference Center. The South Terraces Conference Center is at 115 Perimeter Center Place, Atlanta. Contact Diane Loupe at 404-374-3990 or diane@gabb.org for more information, or visit the GABB webpage.
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