Will appear on Buy-Side pages – RECENT BUYER ARTICLES

Exit Strategies Advises on Management Buyout of Carpenter Crane Hoist

MARE ISLAND, California – Exit Strategies is pleased to have recently served as financial acquisition advisor in management’s carve-out of the Carpenter Crane Hoist division from The Carpenter Group (TCG). The buy-out (MBO) was led by executives Dane Oliver and Ben Jones with the support of an equity partner. The acquisition marks the beginning of an exciting era for Carpenter Crane Hoist (CCH) as management implements plans to expand offerings and operations to address the needs of a growing specialty crane market.

Since its forming in 1996 as the seventh division of The Carpenter Group, CCH has designed and produced overhead cranes for clean rooms and harsh environments. CCH uses proprietary components and materials and customizes every system to satisfy the unique application requirements of its clients. Electronic controls and custom holding fixtures are typical. CCH produces cranes to 25-ton capacity for up to class 10 clean room environments for top semiconductor companies and research facilities across the U.S. For more information see www.carpentercranehoist.com.

The Carpenter Group, with six locations, distributes rigging products to OEMs and end users throughout California and the West Coast in the construction and marine industries and other sectors. The carve-out of CCH made sense for TCG because the business unit was not core to its overall strategy.  See www.carpenterrigging.com for more information.

How Exit Strategies Helped

Management contacted us on the advice of their attorney to determine if a buyout was feasible and to help put the deal on track. Exit Strategies’ role consisted of sizing up the situation, advising management on process and strategy with respect to the proposed carve-out, analyzing historical financials and helping develop projections, valuation calculations, finding a lender to preapprove financing, pitching the spin-off to The Carpenter Group, and working with management’s attorney to negotiate a favorable letter of intent. Umpqua Bank supported the deal with senior term debt. Deal terms are confidential.

About Us

Exit Strategies Group is a California-based M&A brokerage and business valuation firm. Founded in 2002, we mostly serve sellers in lower middle-market  transactions, representing them from start to finish. Our seasoned brokers and advisors have over 100 years of combined deal making experience spanning many industries.  In this instance we are very pleased to have facilitated a successful management buyout and spin-off that benefited all stakeholders.

To find out how Exit Strategies can help you complete a successful business sale, spin-off, merger or acquisition, contact President Al Statz at 707-781-8580, alstatz@exitstrategiesgroup.com.

Recent Changes to the SBA 7(a) Loan Program for Business Acquisition Financing

SBA 7(a) loans are a popular type of financing for small business acquisitions. These loans go up to $5,000,000 and can be used to buy a business, real estate or equipment.  Several changes to the SBA 7(a) program became effective in 2018 that are worth noting.

Some of those changes include:

  1. Lower down payment.  Required down payment has been reduced from 25% of the purchase price to 10% of the project cost (project cost = purchase price + operating capital borrowed + closing costs).
  2. Longer seller note stand-by period. The old SBA rule required a seller note to be on stand-by for 24 months if it was to be considered part of the purchase down payment. The new rule requires any seller note that is part of the down payment to be on stand-by for the entire term of the loan.
  3. Loan amortization length. The old SBA rule allowed the loan term to be equal to the amortization length for the largest portion of the loan proceeds category. The new rule requires 51% of the loan category be real estate if the loan is to be amortized at the real estate term of 25 years.

ESGI’s M&A brokers stay current with the market for business acquisition debt and equity funding, including changes in the popular SBA 7(a) loan program. Our business appraisers regularly provide business appraisals for acquisition funding purposes. We work closely with California and national lenders that actively fund business acquisitions, and would be pleased to help you apply for funding or connect you with a quality lender for your next business sale, acquisition, buy-out or merger.

For more information Email Louis Cionci at LCionci@exitstrategiesgroup.com or call him at 707-781-8582.

First Steps to Buying a Business

I work with a lot of sellers and buyers of small to medium sized businesses in the North San Francisco Bay Area. Most potential buyers do not succeed in buying a business, largely because they lack a systematic approach. A few weeks ago a high-net-worth individual asked for my advice on acquiring a business, and my reply was along the lines of the following.

A simple five step plan that can help you target and invest in a business:

1. Evaluate yourself. Why do you want to own a business? Are you an empire builder or are you looking for a lifestyle business? How will the business impact your personal and family life? Are you a risk taker or do you prefer a steady salary?

2. Identify your expectations. How much income do you need to generate? How much time are you willing to devote to the business?

3. Assess your financial and professional capabilities. How much are you willing to commit to the purchase and startup of a business. Will you require financing? Do you have a financial statement and tax returns that will gain the confidence of a bank or private lender? Does your work and educational background qualify you for the type of business you are seeking?

4. Target your business. Develop an acquisition search with a scope restricted to your targeted industry, size, location and price.

5. Develop a team. Involve your spouse or partner. Collaborate with your C.P.A. and attorney. Contact a business broker /M&A advisor who can identify available businesses that fit your parameters.

For further information or for help buying or selling a business, Don Ross can be reached at 707-778-0210.

 

California Loan Guarantee Program: A viable financing option for small business acquisitions

Banks often use the Small Business Administration 7a program to guarantee acquisition loans for small businesses.  Because small business ventures face unique risks, most do not qualify for conventional bank financing.  In most states, the SBA program is the only option; however, here in California a less well known alternative called the California Loan Guarantee Program is also available.

California’s program is not new. Our state has been offering loan guarantees since 1968.  It is administered by the State Business, Transportation and Housing Agency in partnership with the Governor’s Office of Business and Economic Development.  But it is much smaller than the SBA program.  Our state program approved over $187 million in loans in 2015/16 while the SBA programs (7a and 504) approved over $5 billion in California loans in 2016.

One reason that the State program is not always a first choice is because of the shorter loan term of 7 years as compared to 10 years for the SBA program.  A 7 year loan results in higher monthly payments and more stress on the business.

Comparison of California Loan Guarantee and SBA 7a programs

California Program

SBA 7a

Guarantee Maximum$2,500,000, or up to 80% of the loan whichever is less.$5,000,000, between 75% and 85% of loan value.
Guarantee Fee2%3%-3.75%
Loan Term7 years10 years
AmortizationUp to 25 years10 years
Permissible Uses

working capital, equipment,

business expansion, real estate, acquisition

purchase equipment, fixtures, lease-hold improvements; working capital; inventory or starting a business, acquisition

However, in specific cases the State Program has some clear advantages over the SBA program.  Generally the State Program requires less paperwork and the qualification requirements are not as stringent as the SBA program.  For example, the SBA program requires that the business seller completely divest of his interest in the business and not play a formal role in the operations of the business for more than 12 months after it’s sold.  The California program, on the other hand, does not have these requirements which gives participating banks more latitude in structuring deals.

Not all banks participate in both programs so if you are a prospective buyer in need of a loan it is a good idea to shop around.  The bank providing the loan must provide justification that the loan is helping to create or maintain jobs in California, which is typically not an issue when the loan is intended to fund an acquisition of a small business.

Contact Adam Wiskind at awiskind@exitstrategiesgroup.com with any questions or for help buying, financing or selling a California business.

 

SBA Loan – How to Apply

Thousands of small businesses receive funding for real estate, equipment, working capital and business acquisitions through loans guaranteed by the Small Business Administration (SBA). Terms are very reasonable. Down payments vary from approximately 10%-35% depending on various factors. Interest rates are generally 2-3% above the prime lending rate. This low cost of capital has helped many to achieve the dream of business ownership.

SBA offers two loan types: guaranteed and direct. Guaranteed loans involve the applicant, a lending institution, and the SBA, and are the most frequently used. The guarantee means that if the applicant defaults on the loan, the SBA will be responsible to the lender for 75% to 90% of the loan amount or up to a predetermined maximum amount. Direct loans involve only the SBA and the applicant. The funds available for direct loans are limited. They are available only in special circumstances—for example, if the applicant is handicapped.

If you decide to apply for SBA financing, you will want to follow these steps:

  1. Identify Your Needs. When purchasing real estate, determine what you must spend to get the type of building your firm needs. If you anticipate buying a facility that requires renovation, add these costs to the project and, if approved, the SBA will finance 90% of the total amount. If you need financing for equipment purchases or for tenant improvements, obtain a close assessment of the costs from the vendor or contractor.
  2. Structure Your Loan Proposal. A project occasionally fits the criteria of more than one SBA loan program. When this happens, loan packagers or lenders compare different loan structures including rates and fees so that you can evaluate which program best suits your business.
  3. Apply for SBA Financing. Set a timetable for document deadlines from the start of the application process through the close of escrow funds. If you are purchasing real estate, make arrangements through your lender for a current property appraisal.
  4. Open an Escrow Account. For real estate loans, and often with equipment and working capital loans, you will need to open an escrow account at a title company to complete the transition of property titles, insurance, loan documents, and funds.
  5. Other Considerations. SBA loan offices are generally inundated with applications for financing and have limited time to consider each application. If you choose to apply for financing, decide whether you want to prepare the application yourself, hire a loan packager who specializes in SBA loans, or work with the SBA loan division of your lending institution.

Preparing an SBA loan application more time consuming than other forms of financing; however, it often turns out to be the best financing solution available for small businesses, and should not be dismissed as too onerous. Following these steps should make SBA financing easier to obtain.

Jerry Matecun is based in Orange County, California. To contact Jerry for exit planning and business valuation services, Email jerry@exitstrategiesgroup.com or call (949) 287-8397.

Show Me the Money: Financing Strategies for Small Business Acquisitions

Of the many considerations when purchasing a small business, one of the most important is how to finance it.  Even if you have all of the cash you need to buy a business, as a smart investor you will consider whether you are better off borrowing some of the money or bringing in an equity partner to spread the risk.

Each source of business acquisition financing has its benefits and drawbacks. Before you identify a business that meets your acquisition criteria you should understand how large a business you can afford and where you can secure the funds. You can mix and match the financing strategies below depending on your needs and qualifications, and the deal’s size and complexity:

Family and friends.   If you don’t have the initial capital to acquire a business, consider asking friends and family for help. Those who are close to you and believe in you may be willing to take a chance on your business. The investment could be a gift, a loan or an equity investment in the business. Each have pluses and minuses, and each should be recorded in writing, in many cases a legal document. While a gift may be the most straight forward way for your friends and family to support you, many experts suggest loans as the optimal way for personal relationships to invest in your business plans because there are clear expectations and repayment terms. If you accept an equity investment you are literally turning a friend or family-member into a business partner. This type of relationship can be fraught with challenges and misunderstandings so be sure to clearly define the terms of the investment.

Seller financing.   Consider asking the seller of the business if he or she can provide financing for the sale of all or some of it. The benefit to the seller is that they may make more on a loan to you than alternative investments available to them. Also by taking a note rather than cash they may be able to defer some of the taxes on the sale of the business. There are benefits for the buyer too. In some cases, sellers may provide more reasonable interest rate than the banks. Also sellers that retain a note still have an interest in the success of what was once their business. This can provide you with a built-in source for advice and guidance.

Bank Loan.   To obtain a loan from a bank to purchase a business both the target business and the buyer must be able to qualify. The business should have positive cash flow, solid management experience, industry expertise and a strong credit report. You, as the buyer, must have good credit (at least 640 FICO score), business management experience and in some cases personal collateral to back the loan. Many lenders across the country offer small-business loans guaranteed by the U.S. Small Business Administration (SBA) 7a program. These loans provide lenient and flexible financing for qualifying borrowers. SBA loans have low down payment requirements (as low as 10% on some deals), are structured without balloon payments and have up to 10 year terms which keep loan payments low.

One substantial downside to the SBA loans is that they require personal guarantees, putting you personally on the hook for any defaults by the company. Typical bank loans don’t always have this requirement for businesses generating enough cash flow. SBA 7a loans can have higher interest rates than traditional bank loans. They also require more paperwork and a greater time investment in the documentation and approval process.

401k/IRA.   An often overlooked source of acquisition funding is your personal 401k or IRA. The benefit of this approach is that there is no penalty for early withdrawal nor requirements to repay the funds back into your retirement vehicle. The Internal Revenue Code and the Employee Retirement Income Security Act of 1974 (ERISA) include provisions that permit individuals to invest their retirement funds in stock in their own companies. Often called ROBS (Rollover for Business Start-Ups) the process is fairly straightforward but there are a few legal hurdles, so consult a professional. Also be prudent with your investment as you’ll be risking your retirement savings in your business.

It is important to have a financing strategy prior to making an offer to purchase a business. Contact Adam Wiskind, M&A Broker with Exit Strategies Group, Inc. to discuss your financing options. He can be reached at (707) 781 8744 or awiskind@exitstrategiesgroup.com.

Why Start-Up when you can Acquire a Business?

The successful start-up entrepreneur has been glamorized in the media through reality shows like Shark Tank and wide spread accounts of people that have become fabulously wealthy growing a business that started with a kernel of an idea. However it’s no secret that the rate of start-up failure is notoriously high, according to the bureau of labor statistics about 50% fail within the first five years. With odds like that it is no surprise that start-up entrepreneurship has become synonymous with the young and the wealthy that can afford to lose their shirts.

For the rest of us that are attracted to the autonomy, flexibility and wealth-creation potential of business ownership there is a less risky alternative called “acquisition entrepreneurship”.  There are significant advantages to purchasing a going concern business over starting one:

Instant impact

Rather than toiling away on business plans, capital raises and prototypes, when you acquire a company, you can immediately focus on running, improving and building the business. The sellers have already done the hard part to get the business off the ground. They’ve built the infrastructure, developed policy and procedures, forged relationships with suppliers and most importantly they attracted customers. Achieving and maintaining this momentum is incredibly valuable to the long term success of a company.

Avoid the “ramen phase”

Start-ups can take years to turn a profit. Entrepreneurs are unlikely to be compensated during this formative stage. In contrast, the purchase of an existing business is typically structured so the buyers can a) cover debt service on a loan, b) pay themselves a salary and c) have some additional funds to grow the business.

Choose your job

As a start-up entrepreneur you’ll likely have the dubious honor of being the CEO, salesperson, operations manager, bookkeeper and janitor. You’ll wear all of the hats because you’ll have to. While juggling all of these responsibilities can be exciting, it can also be taxing. If you buy a business you’ll have a chance to choose one where your skills are needed and if you’re lucky there will be employees already working in the business that can do the things that you are not good at.

If you are ready to be your own boss but don’t have a world-changing disruptive idea or aren’t ready to risk your last clean t-shirt on a start-up, acquisition entrepreneurship could be a better path for you.

Books and online resources:

https://store.nolo.com/products/the-complete-guide-to-buying-a-business-buybu.html
https://www.amazon.com/Buying-Selling-Business-Step-Step/dp/0471657026
https://hbr.org/product/hbr-guide-to-buying-a-small-business/10090-PBK-ENG
https://www.sba.gov/tools/sba-learning-center/training/buying-business

If you’d like to hire a professional to help with the process of acquiring a California business, please contact M&A Advisor Adam Wiskind at (707) 781 8744 or awiskind@existrategiesgroup.com.

The Best Financial Decision I Ever Made

In 2007 I found myself at a crossroads. After almost twenty years on a steady career path, I felt it was time for a change. The problem was that I didn’t know what I wanted to do next. I considered going into consulting, did the mandatory networking with old contacts, and even gave serious thought about doing a start-up. But I didn’t have that one great “do what you love” or “change the world” idea.

It was at that point that I started seriously considering buying an established business in California. I spent a couple of hours each day scanning various business for sale websites, and made quite a few inquiries. I learned quickly that there are many great businesses out there, and that people sell for all kinds of reasons. There was such a variety of businesses to explore that it was much easier for me to eliminate business categories that I didn’t want to look at (for me it was restaurants) than to focus my search on any one particular type of business.

I ultimately came across an interesting company that had established an ecommerce presence selling identification and security products – ID cards and readers, printers, convention badges, lanyards, etc. Despite having no prior experience in the industry, it was an easy enough business to understand and to envision how I could make it work. I had done my homework and knew how much cash flow I needed from a business and how large a transaction I could pull off, and this one fit within my parameters. I made an offer, and after a short negotiation we reached agreement on price and deal structure. As of January 2008, I was the proud owner of my own business.

My wife and I ran the business for seven years until we were ultimately bought out by another firm in our industry. After all of the transaction related taxes and other costs, our initial investment in the business had grown by more than 6x during our seven-year ownership. That works out to an annual rate of return of over 30%. In addition, we were able to pay ourselves a decent salary throughout the time we owned the business. There are not many other investments that can pay your salary and grow your net worth at the same time.

In case you missed it, we bought the business in January 2008 – just a few months before the biggest financial crisis in a generation hit. Our timing could not have been worse. Because of the financial crisis, we didn’t come anywhere close to hitting the sales and profit targets that I had projected. In fact, it wasn’t until 2011 that we achieved total sales greater than 2007 – the year before we became the owners. But despite the bad timing, purchasing a business was the best financial decision I ever made.

Mark Soeth is an M&A Advisor with Exit Strategies Group’s Sacramento California office. He can be reached at (916) 307-6868 or msoeth@ExitStrategiesGroup.com. Connect with Mark on LinkedIn.

Benefits of Buying an Established Small Business

So you want to be your own boss ― no superiors, no shareholders, and no board of directors. Consider the options ― you can work as an independent contractor, start your own company, or buy an existing business. Each option has benefits. If you analyze the risks-versus-rewards carefully, you’ll learn what many seasoned entrepreneurs have discovered … the scale tips in favor of purchasing an existing business.

Admittedly, as an independent contractor (including sole practitioner professional practices and consultants) your risk is minimal and the initial investment and overhead costs are relatively low. You can make a comfortable living; however, without the ability to leverage the work of others, your personal production will probably limit financial returns and equity growth.

Starting a business may pay great dividends over time, but it’s important to understand that most start-up businesses falter and eventually fail. According to Michael Gerber, renowned author of The E-Myth Revisited, 40 percent of new businesses fail in the first year and 80 percent fail within 5 years. Poor planning (choice of location, market, product or service) and being undercapitalized are common causes of failure.

On the other hand, purchasing an existing business, when done correctly, reduces an entrepreneur’s risk and provides the opportunity for a return on equity. There are a number of reasons to consider purchasing an existing business rather that starting one:

  • Cash Flow on Day One. Acquisitions are often structured so that you can take a reasonable salary, cover the debt service on acquisition financing, and have some money left over. Owners of start-up businesses, on the other hand, often starve for months or years.
  • Proven Business Model. Buying an established business is less risky ― as a buyer you already know the process or concept works, and the products, services, location and markets are proven. Lots of expensive mistakes have already been made in order to get it right.
  • Acquisition Financing. Existing businesses have a track record of viability. Securing financing for a business acquisition is far easier than funding a start-up for that very reason. A bank can rely on actual historical results for that specific business, not just plans and wishful projections.
  • Recognized Brand. Chances are the seller spent years building a brand. That brand recognition and any marketing the seller has done should transfer to you. When you have an established name and presence in the business community, it’s easier to make cold calls and attract new business than with an unknown, unproven start up.
  • People & Relationships. In a small business acquisition, one of the most valuable and important assets you’re buying is established relationships with people and allied businesses. It took the seller time to find employees, develop them and assimilate them into the company culture. With the right team in place, you will have an easier time implementing growth strategies, and more opportunities to spend time with family, take vacation, or work on other business ventures. In start-up mode, when you go on vacation, the business goes with you. When you purchase an existing business, you also usually buy an existing customer base, vendor base, and other strategic relationships that took years to develop. It’s common for the seller to stay on with the business for some time to ensure that these relationships are properly transferred.
  • Focus on Growth. You may be wondering if buying an existing business leaves enough room for innovation and creativity. Experienced entrepreneurs know that starting a new business means spending a lot of time and money on basic necessities like computers, telephones, furniture and equipment, policies, insurances, permits, recruiting, and numerous other infrastructure and tasks that don’t directly generate cash flow. When you purchase an existing well-run business, because the seller has already laid the foundation, made and corrected the mistakes, incurred the usual string of start-up losses and dispensed with the time-consuming and tedious start-up work, you should be in a position to focus on business improvements, innovation and growth soon after you take the reigns.

10Benefits

Becoming your own boss involves risk, but by successfully purchasing an established business, you can reduce the risk of failure associated with a start up and enjoy the opportunity to build enterprise value over time.

Al Statz can be reached at 707-781-8580 or alstatz@exitstrategiesgroup.com.

The Federal Reserve and Interest Rates

The Federal Reserve controls the three tools of monetary policy — open market operations, the discount rate, and reserve requirements. Using the three tools, the Federal Reserve influences the demand for, and supply of, balances that depository institutions hold at Federal Reserve Banks and in this way alters the federal funds rate.

Changes in the federal funds rate trigger a chain of events that affect other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit, and, ultimately, a range of economic variables, including employment, output, and prices of goods and services [1].

As shown in the graph below, the federal funds rate has been at .25% from 2009 through the end of 2015, primarily as a result of the 2008 financial crisis and the lingering effects on employment and the economy. At the end of 2015, the federal funds rate target was increased to .50%.

Historical United States Federal Funds Rate

usfedfundsrate
Now is a good time for a Company owner looking for an exit strategy, as federal funds interest rates at historically low levels contribute weight to a seller’s market.

[1] More information on the Federal Reserve can be found at their website, http://www.federalreserve.gov/default.htm