Buying a Business

by Diane LoupeSeptember 5, 2020 Buyer Articles, Buyer FAQ, Buying a Business, Seller Articles, Seller FAQ, Selling a business, Uncategorized0 comments

PPP Loans: Financing Business Purchases, Part 2

By Corrie Thrasher, partner, Starfield & Smith PC
This article originated on the blog of the legal firm of Starfield & Smith

Corrie Thrasher, partner, Starfield & Smith PC

As discussed previously in my first article, many uncertainties exist when the owners of a business who received a Paycheck Protection Program (“PPP”) loan wish to transfer their business to a purchaser. Without formal guidance from SBA, these “changes in ownership” transactions pose unprecedented challenges for 7(a) lenders. In this article, I will examine some key considerations for SBA lenders as they seek to manage their existing PPP loans and/or seek to finance change in ownership when the seller has an outstanding PPP loan.

Lender Issues:

Lender issues arise when 1) the lender is the PPP loan holder, and 2) when the lender is financing a business acquisition / change in ownership by virtue of a new 7(a) loan.

Consent of SBA to the Change in Ownership:

SOP 50 57 2 and SBA Procedural Notice 5000-19009 indicate that changes to ownership of a Borrower within twelve (12) months of final disbursement of an existing SBA 7(a) loan (which includes a PPP loan) require SBA’s prior approval. It is unclear whether this requirement applies to any “change of ownership” either by transfer of equity or asset sales. Regardless, many PPP lenders and 7(a) lenders are now faced with the decision if, when and how to submit to SBA for “approval” on change in ownership transactions when the seller received a PPP loan.

However, guidance has been scarce on what form these requests or approvals should take.

Lenders complying with the existing “prior SBA approval” rule, may well do a serious disservice to small businesses by delaying closing until SBA approval is received, which would be in clear violation of SBA’s mission to support small businesses. However, proceeding without prior SBA approval, but in a prudent manner, while achieving the goals of the Agency, may subject lenders to scrutiny by SBA’s Office of Credit Risk Management and possibly, to the loss of its SBA Loan Guaranty, and possibly impact the borrower’s ability to obtain forgiveness.

Possible Default due to Nondisclosure:

Under the standard Form 147 SBA Note (used in many PPP loans), it is considered a default on the loan when a Borrower fails to obtain the consent of the lender to any change in ownership transaction. Specifically, it is a default when a Borrower “reorganizes, merges, consolidates, or otherwise changes ownership or business structure without Lender’s prior written consent.”

Loan Assumptions and Considerations:

Many PPP lenders are now faced with servicing requests from existing PPP borrowers to allow and document in the case of an asset purchase or a stock purchase, an approval of a change of ownership and possibly an assumption of the PPP loan by the new buyer,.

SBA has indicated informally that it will allow changes in ownership upon request, but it will not review or approve the form of assumption agreements, underwriting, or any other documentation. It is unclear to what extent the PPP lender needs to underwrite the buyer who assumes a PPP Loan. There is also no indication whether the existing borrower can be released from its obligations – prudent lending may dictate that PPP lender maintain the existing PPP borrower’s obligations with respect to the PPP loan until forgiveness is decided by SBA. There is also no indication of whether PPP lenders are expected to perform a “full” 7(a) underwriting of a buyer, or a more modest PPP-level of underwriting, or some level in between. Since PPP lenders were allowed to rely on the certifications of borrowers as to their eligibility at the time the PPP loan was made, it seems unreasonable to hold PPP lenders to a higher underwriting standard for the buyer.

This is further complicated by the fact that many lenders made the decision to only lend PPP monies to existing customers in order to streamline the underwriting process under the CARES Act (i.e., KYC). But new buyers of these businesses may not be existing customers of lender; hence, the assumption transaction would require at least a commercially reasonable level of underwriting by the PPP lender, which is, by definition, more than was required of the original PPP loan. It is also unclear whether a PPP lender can charge any fees for their time processing these servicing requests.

Solutions:

Given the thousands of PPP loans extended nationwide, it is critical for anyone buying or selling a business, and their advisors and lenders, to ask about outstanding PPP loans as part of initial underwriting.

Next, lenders need to consider all possible scenarios, taking into account the amount of the PPP loan, the anticipated closing date, whether forgiveness has been applied for/received, and the facts of the particular transaction, in order to adequately allocate risks among the parties and avoid disputes after closing.

For a PPP Lender, dealing with a stock purchase or asset purchase prior to forgiveness processing, informal SBA guidance has been to escrow an amount covering the entire PPP loan. Depending upon the circumstances, the escrow may be for either the benefit of buyer or seller, depending on who will bear the most risk and who should be entitled to the benefit of the forgiveness. However, while escrow will work in most cases, there will be situations, particularly when the size of the PPP loan is larger than the sales price for the business, when the escrow solution will not. In these situations, GP processing may be the best alternative.

The bottom line for all parties is that, in the absence of formal, detailed and reasonable guidance, the goals for lenders are to protect the SBA guaranty and assist small businesses. SBA is working diligently to resolve these issues, but it will take time to address all concerns as these scenarios continue to evolve. Lenders, whether PPP lenders or 7(a) lenders, should consider their policies and procedures, communicate with SBA and consider escrowing the PPP loan payoff at the time of sale/financing, in order to protect the guaranty and mitigate risks.

Corrie is a partner in the Atlanta, Georgia office of Starfield & Smith PC. She specializes in government guaranteed lending, commercial real estate, and banking.

by Ron WestSeptember 4, 2020 Buyer Articles, Buyer FAQ, Buying a Business, Marketing, Seller Articles, Small Business0 comments

Considering Generational Strategies in Business Relationships

When you are buying or selling a business, you might very well end up making a deal with someone from another generation. Therefore, it only makes sense to take the time to understand that individual’s background and how that might change how they behave. It is important to understand their collective experiences and the trends that shaped their identities and perspectives. At the same time, you can identify your own biases, strengths and weaknesses that may be caused by your own upbringing.

The strategies in this article originated from Chuck Underwood who is considered a leading expert in the diversity of communication styles between generations. He is the author of a major book on the subject as well as host of the long-running “America’s Generations with Chuck Underwood” on PBS.

Generational Sensitivity

Underwood’s perspective is that people of each generation were molded by their unique formative years. The decisions that buyers and sellers make will be impacted by their generation. Mostly likely, the buyers or sellers you will be coming into contact with will be Baby Boomers, Generation Xers or Millennials.

Working with Baby Boomers

Baby Boomers (those born between 1946 and 1964) are a major force in the business world. While they often possess a patriotic passion to improve the country, they were also witness to a time of great change via many movements including the civil rights and women’s movement.

When you’re dealing with Baby Boomers, it is important to remember that they will want to build relationships and get to know you. Common courtesy is very important to Baby Boomers. That means they’ll expect you to show up on time and turn your phone off during meetings.

You’ll want to keep in mind that older Baby Boomers may be experiencing hearing and eyesight loss. As a result, you’ll want to keep your type and font size larger, and make text easy to read.

When you’re working with your clients, it only makes sense to pay attention to the generation during which they were raised and adapt your approach accordingly. Understanding generational differences will help you get a leg up on the competition while at the same time helping your clients achieve their goals.

What is Generation X?

Generation X (or Gen X) had a wildly different formative experience than the Baby Boomers. Generation X is generally defined as being born from 1965 to 1980. This generation spent its formative years from the 1970’s through the 1990’s. In stark contrast the relatively more pleasant and optimistic childhoods of the Baby Boomers, Gen X had a rougher ride.

America became more mobile during the time period during which Generation Xers grew up. As a result, many children were uprooted and separated from their friends, family and hometown roots. Growing up, these individuals witnessed a variety of scandals ranging from political and religious figures to sports figures. Gen Xers witnessed the systematic dismantling of the American middle class and with it a general lowering of quality of life, opportunities and confidence in corporations. In the end, Gen X was quite literally left home alone and lived as “latch key kids.” It is no wonder that this neglected generation has some issues.

Individuals growing up during this time learned early on that they had to be ready to fend for themselves. Since Gen Xers have been met with consistent and systematic disappointment and even wide scale institutional betrayal, this generation, on average, is more distrustful of organizations.

Gen Xers are self-reliant and independent and one of their core values is survival of the fittest. In his view, Gen Xers are self-focused, individualistic and want everyone to skip the nonsense and get to the point. They have no real interest in getting to know you or playing a round of golf.

Working with Millennials

Millennials spent their formative years in the 1980s and early 90s. They are a very optimistic and tech savvy generation. They are also the most classroom educated generation in history.

It is also very important to note that Millennials are the most adult-supervised generation in history. They are likely to be offspring of so-called “helicopter parents” who work to protect their children from setbacks. Employers find that Millennials are entering adulthood, but are still relying upon their parents to help them make decisions and even career choices.

Where Gen Xers are distrustful of the “wisdom of their elders,” Millennials actively seek out such advice. Likewise, Millennials tend to volunteer a good deal and look for ways to solve the world’s largest problems.

Millennials will enjoy building a relationship with you. Keep in mind these individuals tend to be quite socially conscious, and they may very well expect you to agree with their views. Additionally, there is a chance that they will have their parents involved in their business dealings.

Keep in mind that the de facto tech addiction, or at the very least acute overreliance on technology, has led to issues with Millennials’ soft skills. They can often lack the ability to read another person’s body language and adjust accordingly.

In the end, regardless of what generation you are working with, it is important that you continually adapt. This will greatly increase the odds of cementing a successful deal.

Copyright: Business Brokerage Press, Inc.

Mangostar/BigStock.com

The post Considering Generational Strategies appeared first on Deal Studio – Automate, accelerate and elevate your deal making.

by Diane LoupeAugust 26, 2020 Buying a Business, COVID-19, Financing a Business Sale, SBA Loans, Small Business, Uncategorized0 comments

PPP Loans and Business Sales

By Corrie Thrasher, partner, Starfield & Smith PC
This article originally appeared on the blog of the legal firm of Starfield & Smith

When an Original Borrower has received a Paycheck Protection Program (“PPP”) Loan and, prior to loan forgiveness, wishes to transfer ownership to a new purchaser, lenders often find themselves uncertain as to how to proceed. With no official guidance yet from the SBA, may lenders proceed in a prudent manner by keeping program goals in mind, or should they look to “pre-COVID-19 emergency” rules (the SOPs) to guide them? Much remains unknown.

When a sale of a small business takes place, such transactions are considered “changes in ownership” under SBA rules, whether an asset purchase or a stock purchase. Many prospective sellers and buyers assume that the SBA rules are not relevant to their change in ownership transaction because any PPP Loan is “non-recourse” and “forgivable.” The PPP loan is non-recourse in the sense that no personal guaranties and no collateral were required under the program. A particular loan may be forgivable to the extent that eligible uses of proceeds are, in fact, eventually forgiven. However, important considerations for any prospective buyer or seller include not only whether the PPP loan will actually be forgiven, in whole or in part, but also whether the PPP loan was properly applied for and administered by the Original PPP borrower.

If the purchase and sale agreement (“PSA”) between Buyer and Seller is drafted in a way that does not account for each party’s rights and obligations with regard to the PPP loan, serious harm could result to the seller, the buyer, the business, the original PPP lender and any new SBA 7(a) lender. The estimate of potential harm is currently playing out in real-time, with essentially no guidelines or process for “PPP guaranty purchase” or how traditional guaranty purchase rules will be applied to lenders who assist in financing the new 7(a) loan.

In those transactions in which a decision on forgiveness has not yet been issued by SBA (this would apply to all such PPP loans at present), there are several considerations to keep in mind:

Does the PSA indicate whether Buyer, Seller or both will be responsible for completing the forgiveness application and which party will bear the risk of a denial, in part or in whole, of forgiveness?
Can a party other than the original PPP lender even review the PPP forgiveness application prior to submission to SBA?
Between Buyer and Seller, who is in the best position to verify the accuracy of the information contained in the forgiveness application and supporting documents?
Are a Seller’s obligations ongoing or do they terminate at closing?
Will a Seller be around if Buyer has questions regarding the forgiveness application or if SBA or its Office of Inspector General initiates an audit or investigation of the PPP loan itself?
Does it matter if the transaction is structured as a stock purchase or an asset purchase?

If the transaction is an asset purchase, a Seller will presumably file the forgiveness application. If however, the transaction is structured as a stock purchase, a Buyer will step into the shoes of the Original PPP borrower because there has been no change in entity. So the entity will presumably apply for forgiveness (but will the principal(s) of the Original Borrower assist and/or certify as to the truth of the original certifications?). Regardless, the PSA should contemplate all of these circumstances, which must then be agreed to by all parties.

The buyer and seller to any acquisition need to address all of these scenarios upfront, and notify the PPP lender at the earliest opportunity of the prospective sale. All affected parties should agree upon a reasonable and appropriate structure, one in which accountability should be placed on the party or parties best able to manage and assume the risk.

Sellers, in particular, should keep in mind that a failure to notify the PPP lender or to obtain SBA consent to any change in ownership may result in a technical default under the PPP loan. Any such failure may result in a denial of forgiveness, and may lead to other unforeseen consequences.

In Part 2 of this article, I will shift the focus from buyers and sellers to lenders. The article will examine the risks imposed on lenders and how they may wish to approach these transactions if formal guidance by SBA is still not available.

(more…)

by Diane LoupeAugust 15, 2020 Buyer Articles, Buyer FAQ, Buying a Business, Economic News, Marketing, Seller Articles, Uncategorized0 comments

The Biggest Mistakes Business Buyers Make

By Peter Siegel MBA, BizBen Founder

The biggest mistake made by buyers is not seeking professional representation and guidance before closing the purchase transaction. Without an experienced broker or attorney on their side, a buyer is prone to making numerous mistakes, some of which can jeopardize the viability of the business.

Even in those transactions that involved a business escrow and SBA financing, I have seen disputes and even litigation between buyers and sellers result from the buyer and seller leaving significant terms “to be determined” after closing, or failing to address significant legal issues prior to closing. For example, buyers and sellers often agree that the seller will providing consulting services to the buyer after closing, but some buyers and sellers close escrow before agreeing to the details of such an arrangement.

Once the seller has pocketed the sales proceeds, he has little reason to negotiate such an arrangement on terms favorable to the buyer. With respect to legal issues, buyers also occasionally fail to obtain an assignment of all of the seller’s rights under important contracts, including leases, prior to closing. Landlords, vendors, or customers operating under contracts with the seller may, under some circumstances, refuse to do business with the buyer, and this can be fatal to a business.

I asked other business brokers, advisors and intermediaries what they thought about this, and here are some of their responses:

(more…)

by Diane LoupeJuly 31, 2020 Business Marketing, Buyer Articles, Buying a Business, Company News, COVID-19, Economic News, Small Business0 comments

How You can Help Local Restaurants Survive

By Hannah Eisenband, a Customer Service Specialist at We Sell Restaurants

Restaurants are struggling. Restaurants have defined our economy for generations. In 2019, restaurants generated almost $900 billion in sales and employed more than 15 million people. It is estimated that 20-30% of restaurants will not survive this pandemic. This would mean that up to 4.5 million employees will lose their jobs.

Please consider supporting all restaurants in your local community.

Eat locally

o Whether you are currently eating in a restaurant or ordering takeout, restaurants need your business now more than ever! Check to see if your favorite local restaurants have a delivery service or if they use third party delivery services.

Treat yourself or a friend to a (future) meal

o Purchase a gift card! You may not feel comfortable eating in a restaurant right now, but you will soon. You and your friends can do a gift card exchange and try all your favorite local restaurants.

Shout them out!

o Reviews and social media posts rule our world. Give your favorite restaurants some love. Inform people of how restaurants are implementing social distancing and sanitation.

Tip like you are paying someone’s rent

o If you can afford it, make someone’s day. Waiters have fewer tables and are under more pressure because they are wearing masks and constantly cleaning. It is tough for everyone during this pandemic.

Be patient – try not to be hangry

o Remember everyone is still learning about this new world. Restaurants are functioning with more regulations than ever before. Continue to support and work with these restaurant owners while they learn how to serve you.

Do you have other thoughts for helping restaurants? Post them in the comments section and let’s all pull together to assist an industry in need. Other articles with COVID19 advice are available at this link.

This article was written by Hannah Eisenband of the South Florida We Sell Restaurants office.

Hannah Eisenband is a Customer Service Specialist at We Sell Restaurants, which is owned by GABB members Robin and Eric Gagnon. She works directly with the franchise owner and is the initial contact person for buyers for the South Florida franchise.

Hannah graduated from the University of Central Florida with a degree in Business. Hannah has previously worked in the commercial real estate industry with a large commercial property management firm. In this capacity, she worked with tenant compliance issues. Hannah grew up in the restaurant business as her parents owned two restaurants in South Florida. She was helping in the kitchen and the front of the house from an early age and is well versed in all aspects of the hospitality industry.