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Business Acquisition and Lenders

White8

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Dec 6, 2007
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I am in the process of buying an existing business and thought I would pass on what I have learned in the process.

Most small business loans are backed by the SBA. You can find a list of lenders at www.sba.gov/localresources/index.html select your state and then SBA Lenders. I personally prefer fixed rates since historically prime has reached 18+%. I have found that Wachovia, Wells Fargo, and one of my regional banks offer fixed rates.

Lenders will require at least three years of tax returns for the business and yourself to even begin so have them available. They will also require the business financials. Something else to consider, do the financials show a true picture of how the business is performing? The current owner of the business I am purchasing has used a few different strategies to offset his tax liability so the tax returns show less than true profit. Fortunately, my broker has created a spreadsheet that shows exactly what has been done which more than satisfied the lender. This particular lender said that he and his lending institution are more than happy to recognize justifiable tax strategies but he won't talk to people who are purchasing businesses that have unjustifiable tax strategies such as leasing Hummers as "company vehicles" and paying for the kid's gas while he is in college.

Lenders want to see a business plan with reasonable sale/profit projections of 3-5%. Unrealistic projections get red flagged so don't put down that your business is going to grow 80% next year. This seems to be more of a test of a buyer's knowledge of the type of business being bought and what it can realistically do. Other than that he said it's pretty worthless since no one can truly predict exactly what a business will do next year so it just goes into the file.

Be prepared to write the lender a refundable deposit of $1,500-2,500 to process the loan. Normally your personal credit check will cost the lender $50-70 and the rest is applied to the loan. This deposit is designed to eliminate time wasters.

Once the lender is comfortable with the financial side of the transaction, they will want to know that you have industry experience or experience of a similar level in another industry. For example: I owned a John Deere dealership with 15 employees and X sales; I am buying a contracting business with 15 employees and similar sales. Be sure to have your resume up to date and be prepared for somewhat of an interview.

The process has not been difficult so far but is time consuming. I’ve spent a pretty fair amount of time on the phone and in front of my computer answering questions and chasing documents. Do yourself a favor and buy a printer/scanner/copier with auto document feed. You will be filling out lots of applications, some of which have 20+ pages and it’s much faster to scan them and email them than fax them. It’s also helpful to have them on your computer so you can quickly find them when you get yet another call.
 

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Runum

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Thanks for posting this. I have often wondered about this process. Keep us up to date on your progress. ++++speed
 

randallg99

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what kind of business are you requiring an SBA for? (if too personal, no need to reply...)

my experience with SBA was exhausting... if you have enough equity in real estate, you may as well just use a home equity loan since SBA requires collateral anyway
 
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White8

White8

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Dec 6, 2007
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Thanks for the rep points Renum and Slim Jim.

Randallg99: The business is a commercial electrical contractor. The business doesn't include real estate but the cash flow and my personal cash reserves seem to satisfy the lenders. The loan type is a 7A and although they need a fair amount of documentation, so far it hasn't been unreasonable.
 

andviv

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Rep++
This is the type of info that is great for the forum members!!!
 
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White8

White8

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Dec 6, 2007
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Thanks all for the rep points.

Something else I am finding in this process is my broker is an invaluable asset. Since any good broker has been through the process before, he can quickly provide the lenders with the answers they need as well as work with me on the documentation. Could I do this all myself? Yes, but what takes an hour with a conference call between the lender, the broker, and myself could take much more time if done by myself and not satisfy the lender as completely.
 
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White8

White8

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Dec 6, 2007
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I normally don't give personal references on forums but the loan officer I have been working with at Wachovia is an exception. He really put in the time to get my loan app for a ten year fixed at 7.5% in to the underwriters before the March 31 deadline. Never before have I had a lender send me emails at 11:00pm or 4:30am. If you are looking for a business loan send him an email.

Ed Randall
ed.randall at wachoviasbc.com
 

fanocks2003

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Lenders want to see a business plan with reasonable sale/profit projections of 3-5%. Unrealistic projections get red flagged so don't put down that your business is going to grow 80% next year. This seems to be more of a test of a buyer's knowledge of the type of business being bought and what it can realistically do. Other than that he said it's pretty worthless since no one can truly predict exactly what a business will do next year so it just goes into the file.

Be prepared to write the lender a refundable deposit of $1,500-2,500 to process the loan. Normally your personal credit check will cost the lender $50-70 and the rest is applied to the loan. This deposit is designed to eliminate time wasters.

Once the lender is comfortable with the financial side of the transaction, they will want to know that you have industry experience or experience of a similar level in another industry. For example: I owned a John Deere dealership with 15 employees and X sales; I am buying a contracting business with 15 employees and similar sales. Be sure to have your resume up to date and be prepared for somewhat of an interview.

The process has not been difficult so far but is time consuming. I’ve spent a pretty fair amount of time on the phone and in front of my computer answering questions and chasing documents. Do yourself a favor and buy a printer/scanner/copier with auto document feed. You will be filling out lots of applications, some of which have 20+ pages and it’s much faster to scan them and email them than fax them. It’s also helpful to have them on your computer so you can quickly find them when you get yet another call.
If you buy a company the earnings will pretty much give a picture of what the business can earn after fixed expenses. Lenders then give X% loan against such value.

If the numbers doesn't speak for most of the deal then drop the deal. If you are not the best guy to run the company then find someone who is and let him give the picture of how this company will be run. That increases your chances to get a loan from the bank. Banks are ultra conservative and if they can't trust someone they won't lend to them. I know, I am a private lender myself. I have almost the same criterias.

I also own a debt salvation company who demands almost the same things a normal bank would when giving salvation loans. The only difference being that my company understands that the one applying for a loan doesn't have a good credit at all. But the same rules apply. More so in the business I own.
 
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White8

White8

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Dec 6, 2007
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Update:

I signed the commitment letter yesterday. :icon_super:

The financing of this business has been quite a lengthy process and a real learning experience. I have spent hours on the phone with loan officers, underwriters, and credit analysts answering all sorts of questions as well as providing all sorts of documents. You would think that all lenders would use the same playbook which they do to an extent but not entirely.

My first choice of lenders fell by the wayside after wanting me to take a partner which I really did not want to do. I ended up with Wells Fargo which I prefer because it has local branches and the other lenders did not. I ended up with an excellent rate on a variable and the loan officer told me that after the loan has seasoned for a year or two it can easily be shifted to a fixed.

The most irritating aspect of the financing has been the time the lenders have taken which for most has been two months and the fact that commitment letters have a 7 day expiration after which they may extend, change terms, or simply change their minds about the loan.

If you are planning to buy, get ready for a long term project on the financing and if you are in the process push to get a commitment letter by June 16 because after the SBA will require a third party appraisal of any business over $300k which runs around $2500.
 

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phlgirl

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Great news, White8. Congrats!!

Are there things you could have prepared (in hindsight), to make the process move faster? Why was the first bank asking that you take on a partner? Did they not see your own business experience as sufficient?

Is the entire loan variable? Do you mind me asking what the term of the loan is? 20 yr? 25? What % of the purchase price were they willing to extend? Did this bank also offer the LOC on the backend, which matches the amount of your downpayment?

If any of this is too personal, no need to answer. Just curious, as someone who is expecting to be entering this process faily soon. :)
 

eTyler19

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Feb 19, 2008
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Thanks! ++spEED

What type of down payment are they requiring you to have? Also is the seller offering any financing.. if so, is it affect the lenders decision at all?

Thanks again!
 
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White8

White8

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Dec 6, 2007
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Thanks! I'm pretty excited.

As far as preparation, I was pretty well prepared and got the lenders the documents they needed quickly. Fortunately, the seller had clean books and the broker did an excellent job of documenting how the seller's tax strategies made the cash flow look significantly smaller than it truly was. The main issue was the fact that after the loan officer collects documents the process shifts into low. If you are preparing documents on your end for a purchase get the following documents updated and scanned so you'll be ready to email them. (Many, many times)

Personal:

Personal Financial Statement
Three years of personal tax returns
Resume showing management experience
A draft letter showing how your management experience translates to the industry you are buying into. (They may or may not want this)

On the business side you'll need:

Three years of tax returns
Three years of financial statements
Asset List
Signed purchase agreement
A/R aging
A/P aging
Employee list (possibly)
Industry license information (possibly)
Customer type breakdown (possibly)
The reason the seller is selling (possibly)
Documentation explaining discrepancies between financials and taxes

The reason behind the request of a partner was due to lack of direct industry experience which seems odd since the company is reasonably large and has management in place. I intend to manage the business side while managers manage the day to day aspect which to me is better than someone with little business experience managing the business side which seems to make lenders more comfortable. My broker and I have discussed some of the really messed up businesses managed by people who are excellent in their field with little business experience.

The loan is entirely variable at 6.75% and a 10 year term. Ten years is the maximum with SBA and no real estate. It's my understanding that with real estate there is a split with the real estate aspect financed up to 25-30 years. The variable initially made me very nervous but the only fixed they could offer was three years and after discussing it with my broker who in this case has no interest in which loan I chose I went with the variable due to a .7% difference and his theorization that we will see constant or lower prime rates in the next few years. The loan officer also told me that he wasn't supposed to tell me but after a year or two of seasoning it's easy to switch to a fixed.

The lenders I spoke with could offer between 10-15% down partly influenced by SBA standards. Wells Fargo was 15%. The seller will also carry back 10% on this deal and lenders varied between 10-15%. One nice aspect of Wells Fargo for the seller is there is no standby on his loan. Some of the lenders require a full 10 year standby which means the seller would not see a single payment on his carry back for 10 years. If your down is larger, the lender is more willing to forgo the seller carry back. I personally like the notion of a seller carry back as it ties him to the success of the buyer.

Regarding LOC, Wells Fargo was willing to do $50k which is less than the down payment. Once again, the loan officer said accept what is offered and with a little seasoning they can increase it significantly. Some of the lenders were willing to go higher and some wanted to offer term loans instead of a LOC. Since this business has very healthy cash flow, I'm just looking for something as a back up for the first few months since it is a net 30 business. It will be a little tight in the first couple of months since my billings will be passing the customer bills in the mail.

Something I have also been told with lenders is if they make a commitment that fits your need closely, pick the best one and push for more after you sign the commitment and season the loan. If you push too hard the loan may have to go back through the lengthy approval process again and they may pull the offer.

Good Luck
 

phlgirl

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Great info, White8!! Thanks for taking the time to post all of this information here. +++

I had no idea about the 10 year money for non RE projects. Most of the operations we are looking at involve owning the bricks but in some cases this is not the case. Great to know that the terms are different. I have been crunching the wrong numbers. :)

Best of luck with the new biz!!
 
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White8

White8

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Dec 6, 2007
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The 10 year aspect does put the deal in a whole different category. I don't know if that holds true for non SBA loans or not but the only loans I was offered, and the business has strong cash flow, were SBA.

I'm now in the phase were the CPAs and attorneys are going back on forth on the final details.

CPAs: Asset allocation. The buyer wants the greatest values to be placed on depreciable assets while the seller wants the greatest values placed on the non depreciable assets since he has to pick up the depreciation in taxes as depreciation is a tax delay tactic. EX. Seller has a truck that he paid $20k for and has depreciated it by $10k If he sells it for $15k there is a $5k difference to pick up.

Attorneys: They are both hashing out the small details that the purchase agreement didn't fully address.

Both are important professionals to have on your team despite their cost. Both their direct input and the fact that they isolate the buyer and seller from each other somewhat are helpful and help to avoid any ill feelings between buyer and seller. It's nice to have an attorney to "blame" for something "unreasonable" that ends up a part of the negotiation.
 
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White8

White8

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Dec 6, 2007
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Salem, OR
The purchase closed on schedule after some tense moments when the physical inventory significantly exceeded the estimate the seller had given to the broker originally but we were able to work it out.

I've spent the last week at the business learning more about its operation and am having a hard time not making changes until the employees and customers have had a chance to adapt to me. Once things calm down I have many changes I will be making to improve inventory control and reduce office work as well as numerous marketing ideas to employ in the existing market and a larger market that they have not even looked at.

As a side benefit to the business I have discovered a potential sideline business that from what I've seen could be as profitable or more profitable than the primary business. It seems that there is a significantly profitable market for used/reconditioned, obsolete, and hard to find circuit breakers.
 

andviv

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Congrats on completing the transaction!

I assume that, as part of Due Diligence, you had a chance to interview the employees, right?

Have you asked them what would they do to improve what they do today?
Maybe ask them: "What is your greatest challenge on what you do everyday?" or "If this were your company, what would you do next? I'd like to know your opinion as I value your experience and knowledge of what you do".

They may give you great insight and already have thought of ways to do things better.
Also, it may help as morale booster as people will probably feel your openness to new ideas and that you do listen to them.

Congrats again!
 

randallg99

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............

I've spent the last week at the business learning more about its operation and am having a hard time not making changes until the employees and customers have had a chance to adapt to me. Once things calm down I have many changes I will be making to improve inventory control and reduce office work as well as numerous marketing ideas to employ in the existing market and a larger market that they have not even looked at.
...
first of all, congrats. I have been reading this thread and its nice to see the plan in action and wish you much success in your new endeavor.

the devils advocate in me asks if changes made immediately is the best course of action, but thats a rule from politicians playbook - first 100 days in office are meant for the most drastic changes to get everyone on the same wavelength... its your company and its your call.

good luck to you.




...

Have you asked them what would they do to improve what they do today?
Maybe ask them: "What is your greatest challenge on what you do everyday?" or "If this were your company, what would you do next? I'd like to know your opinion as I value your experience and knowledge of what you do".

They may give you great insight and already have thought of ways to do things better.
Also, it may help as morale booster as people will probably feel your openness to new ideas and that you do listen to them. ...!
excellent, excellent advice. rep+

many of the questions proposed during an exit interview would apply perfectly in this scenario.

individual 1 on 1 or department meetings have more credence then company wide meetings... but whatever time allows, this is an excellent way to grow and solidify the biz.

R
 
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White8

White8

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Dec 6, 2007
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Salem, OR
Thanks for the congrats!

I've spoken with all of the employees and asked for suggestions but have not received any yet. I'm in the process of building a rapport with the employees and have with the office manager and office assistant. The electricians are a little more difficult to build a rapport with since I see them in the morning and then just before they leave for the day as they are out most of the day but they did appreciate the donuts I brought in last week. I also have two who are interested in the estimator position once they pass the appropriate CCB tests.

As far as making immediate changes, I think the employees will be more receptive once they are confident that their jobs will be staying basically the same. I don't want a mass exodus because they perceive that the new owner plans to entirely change their work environment.
 

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