Can A Buyer Purchase A Business With No Collateral?
At first glance, the idea of buying a business with no collateral may seem impossible but in reality, it can be done. Let’s examine your options. When it comes to achieving this goal, your greatest assets are an open mind and a commitment to hanging in there despite the odds.
Collateral: The Small Business Association’s 7 (a) Program is Your Friend
One possible avenue for buying a business with zero collateral is to opt for the SBA’s 7 (a) program, which works to incentivize the bank to make a loan to a prospective buyer. Under this program, the SBA guarantees 75%. The buyer still has to put in 25%; however, this money doesn’t necessarily have to be his or her money. This is where things really get interesting. The cash that the buyer uses can come from investors or even be a gift from parents in the case of young buyers. These possibilities all fall within the SBA’s guidelines.
Look into Seller Financing, You Might Be Surprised
There is a second way to buy a business with no collateral, and that comes in the form of finding a seller who is willing to finance. Again, this might seem counter-intuitive at first glance. But the facts are that a large percentage of sellers do agree to offer some level of financing.
In other words, seller financing is not unheard of. In fact, it stands as a viable way for a prospective buyer to buy without collateral.
Combining Seller Financing and the SBA’s 7 (a) Program
Combining the SBA’s 7 (a) program with seller financing can prove to be a powerful combination. It is important to note, however, that if you do use the SBA’s 7 (a) program the seller cannot receive his or her repayment for two years.
Persistence Pays
Ultimately, you will likely need to be rather persistent when trying to find a bank. Rejection is likely. But if you are persistent, it is possible to make the SBA’s 7 (a) program work for you.
One key way to keep yourself motivated is to constantly remember that jumping through some hurdles is all part of the process since you’re trying to circumvent the traditional route of using collateral. But working relentlessly may be worth it because if you are successful, you have acquired a tangible asset without any collateral of your own. That is no small accomplishment.
Don’t be afraid to ask for advice from S.C.O.R.E., the Small Business Administration (SBA), or an experienced business broker. While it might sound very unlikely that you’ll be able to buy a business without collateral, plenty of people have successfully done so.
Copyright: Business Brokerage Press, Inc.
Read More3 Overlooked Areas To Investigate Before Buying A Business
Before you jump in and buy any business, you’ll want to do your due diligence. Buying a business is no time to make assumptions or simply wing it. The only prudent course is to carefully investigate any business before buying, as the consequences of not doing so can in fact be rather dire. Let’s take a quick look at the three top overlooked areas to investigate before signing on the dotted line and buying a business.
1. Retirement Plans
Many buyers forget all about retirement plans when investigating a business prior to purchase. However, a failure to examine what regulations have been put into place could spell out disaster. For this reason, you’ll want to make certain that the business’s qualified and non-qualified retirement plans are up to date with the Department of Labor. There can be many surprises when you buy a business, but this is one you want to avoid.
2. 1099’s and W-2’s
Just as many prospective buyers fail to investigate the retirement plan of a business, the same is often true concerning 1099’s and W-2’s. In short, you’ll want to be sure that if 1099’s have been given out instead of W-2’s that it has been always done within existing IRS parameters. There is no reason to buy a business only to discover a headache with the IRS.
And speaking of employees, does the business you are interested in buying have employee handbooks? If so, you’ll want to make sure you review it carefully.
3. All Legal Documents
The simple fact is that you never want the business you are interested in buying to have its corporate veil pierced once you take over. You should carefully review all trademarks, copyrights and other areas of intellectual property to be sure that everything is completely in order. You’ll want to obtain copies of all consulting agreements, documents involving inventions as well as intellectual property assignments.
Everything should be protected and on legally sound footing. If you see any problems in this category you should run for the hills and find another business to buy.
Protect Yourself from a Potential Lifetime of Regret
Evaluating overlooked areas is essential in protecting your investment. For most people, the purchase of a business is the largest of his or her lifetime. It leaves little room for error.
Not only is it vital to investigate the major areas, but it is also essential to explore the smaller details. However, the truth of the matter is that when you’re buying a business there are no “small details.” No one realizes this fact more so than business brokers. Business brokers are experts in what it takes to buy and sell businesses. Working with a business broker is a significant move in the right direction. The time you invest in properly exploring and evaluating a business is time well spent and may literally save you from a lifetime of regret.
Copyright: Business Brokerage Press, Inc.
Read MoreImportant Items To Consider When Buying A Franchise
If you are considering entering the world of franchising, an important consideration is assessing the value of the business. All of the following factors either affect or help determine valuations of typical franchise operations:
1. Franchise Agreements:
Typically, franchise agreements can cover a period of twenty years; sometimes with added options. In most situations where a franchise unit has fewer than ten years remaining on the agreement (and options, if any), the value would diminish proportionately.
2. Territory Exclusivity:
Many franchisors do not, as a matter of course, provide an “exclusive” to franchisees within a given territory. More commonly, however, the franchisor will offer a franchisee limited protection for five years, during which time only he or she will be allowed to expand operation to additional units. Even limited protection can be assigned some value; any current territorial rights may have additional — and significant — value.
3. Business Hours
Potential franchisees should consider operating hours when assessing the value of a business. Business in general, and franchise operations in particular, are staying open for increasingly longer periods — some operate 24 hours a day, seven days a week. Locations in certain areas — city centers, bus stations, train depots — may open for shorter hours and fewer days. Since most business owners/managers would prefer the less demanding hours of operation, a premium value will be placed on these units.
4. Location:
This is the most obvious variable. A franchise operation in a suburban or small-town setting has a higher value than one in an inner-city or high-crime-rate area, regardless of other similarities (rent, sales volume, etc.).
5. Cash Flow:
Surprisingly, profitability may not necessarily be the key factor in valuing a franchise operation. A demonstrated, well-documented cash flow can definitely add value to the unit; however, the smart buyer will also look at other variables, such as unusually low food costs or labor costs, sales history, and potential for growth or improvement under new management in determining the overall value. Extreme situations provide the obvious exceptions to importance of cash flow: where the cash flow is extraordinarily high, capitalization of earnings becomes a truer method of valuation; where the franchise is actually losing money due to inefficient management, there would be some reduction in value.
6. Leases:
Taking into consideration market variation, the typical rent will be set at approximately ten percent of retail sales. Modifications in value could result if the lease does not cover a period of at least ten years.
7. Remodeling:
Many franchise agreements will require units to be refurbished within a certain number of years (ten is typical), with the franchisee bearing the cost. Since these costs typically fall within a range from $75,000 to $150,000, potential franchisees should pay particular attention to where the operation stands on this timeline. For example, a unit due for remodeling in a year or less could be reduced in value by a fair percentage of the cost of the improvements. The total cost would not be deducted from the value, since these improvements would also be expected to improve business anywhere from five to twenty-five percent.
S-Corporation VS. C-Corporation What is the best legal structure for your business?
S-CORPORATION VS. C-CORPORATION What is the best legal structure for your business? While there is an assortment of different structures (corporation, limited liability company, partnership, etc.), it is first important to understand the difference between an S-corporation (“S-corp”) and C-corporation (“C-corp”).
An S-corp is a corporation that elects to be taxed under Subchapter S of the Internal Revenue Code. The profits (and losses) of an S-corp flow through the entity, and the shareholders are taxed at the personal level. On the contrary, a C-corp is taxed on its profits as a taxpaying entity, and the shareholders are taxed again when dividends are distributed. While this “double taxation” may not seem appealing, there are some advantages for larger corporations. For example, the income of an S-corp may bump the shareholders into a higher tax bracket, resulting in higher tax liability. However, a C-corp can withhold dividend distributions to shareholders to avoid this. This option is not available for an S-corp because the profits automatically flow through to the shareholders.
Despite the differences in taxes, S-corps and C-corps are quite similar. They are both separate entities from the shareholders, subject to federal and state securities laws, protect shareholders from liabilities of the corporation (if managed correctly), require filing documents with the Secretary of State, have a Board of Directors and officers, and must observe corporate formalities. Directors and officers have responsibility for the management of the business, and most decisions must be approved by the Board in a formal meeting or written document. On the contrary, shareholders generally are not entitled to actively participate in management.
S-corps have many restrictions. They cannot have more than 100 shareholders, all shareholders must be U.S. citizens or resident aliens, and certain trusts and tax exempt entities cannot be shareholders. S-corps can also only have one class of stock. However, C-corps provide flexibility through various classes and series of preferred stock (stock that permit preferential voting rights and distributions to the owners). Therefore, C-corps are more appealing to investors and are best if there are plans for an Initial Public Offering (IPO) in the future. Unlike a C-corp, non-taxable fringe benefits (group health insurance, accidental or death benefits, etc.) are generally not excludable from the owner’s income or deductible by an S-corp. Shareholders who work for an S-corp may be treated as self-employed, rather than a W-2 employee (as with C-corps). In this case, they are not entitled to many benefits, such as health and death benefits.
When choosing a legal structure for your business, it is important to consider all aspects and consult with your Certified Public Accountant and attorney. If you have any questions about forming a business entity or any other business law matter, please contact the Law Offices of Tyler Q. Dahl for a free consultation.
Disclaimer: This material was prepared for general informational purposes only, and is not intended to create an attorney-client relationship and does not constitute legal advice. This material should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction. You should always consult a qualified attorney regarding any specific legal problem or matter.
Content provided by Law Offices of Tyler Q. Dahl
333 University Avenue, Suite 200
Sacramento, CA 95825
info@tqdlaw.com
Is It Possible To Sell Your Business To A Competitor?
A common question in the realm of buying and selling businesses is, “Is it possible to sell your business to a competitor?” The short answer is yes, it is quite possible and rather common. That stated, selling to a business competitor is different than selling to a buyer who is completely new to the industry. The two types of buyers should not be treated the same way, as there are various differing variables.
A Competitor Can Be a Great Buyer
One reason is that a competitor may indeed be the right party to buy your business, is that they usually have an excellent understanding of how your business and your industry works. They may also enter the negotiation process already understanding the value of your business, and this can serve to speed up the process.
Always Proceed with Caution
Competitors, however, must be approached carefully. Unfortunately, there have been many cases where competitors acted as though they wanted to buy in order to acquire access to inside information. That’s why sensitive information like client lists and other “secrets” shouldn’t be shared until the sale is complete and the money is literally in the bank.
Working with a business broker is always a prudent move when it comes to buying and selling businesses; however, when working with a competitor is involved a business broker is even more important than normal. A business broker can act as something of a shield in the process, helping to ensure that you don’t reveal too much prized information until the sale is 100% complete.
Negotiate from a Place of Knowledge
Further, a business broker understands how much your business is worth and can back up that valuation. Having this information before discussing a potential sale with a competitor is of great importance.
Be Prepared to Accept Certain Legal Conditions
Finally, don’t be surprised if your competitor asks you to sign a non-compete or for you to stay on as a consult after he or she has acquired your business. This is a prudent step and one that makes tremendous sense. If you were buying a business from a competitor wouldn’t you want to make certain that the competitor didn’t simply “set up shop” somewhere else a few months or even a couple of years later? Likewise, tapping your expertise is another prudent move for your former competitor.
Summed up, selling your business to a competitor is a potentially great move, but it is also an opportunity that absolutely must be explored with extreme caution. Never divulge critical information to your competitor until the deal is finalized.
Read MoreFinancial vs. Strategic Buyer- Did Microsoft Overpay for LinkedIn?
Microsoft’s recent $26.2 billion acquisition of LinkedIn provides an illustrative example of a strategic acquisition – the type of sale that usually garners the most gain for the acquired company’s shareholders.
You may be wondering what a billion-dollar acquisition has to do with your business, but the very same reasons a strategic acquirer buys a $26 billion business holds true for the acquisition of a $2 million company.
The financial vs. strategic buyer
A financial buyer is buying the future stream of profits coming from your business, whereas the strategic buyer is buying your business for what it is worth in their hands. To simplify, a financial acquirer buys your business because they think they can sell more of your stuff, whereas a strategic buyer acquires your business because they think it will help them sell more of their stuff.
One might argue that Microsoft overpaid for LinkedIn given that LinkedIn only generated a few hundred million dollars in EBITDA last year, meaning the good folks in Redmond paid an astronomical multiple of LinkedIn’s earnings.
But earnings are not the only thing strategic acquirers care about when they go to make an acquisition.
Microsoft‘s acquisition of LinkedIn is a classic example of a strategic acquisition. The Redmond-based technology giant has been undergoing a major transformation from being a software company focused on operating systems to a business concentrating on cloud-based software applications. Microsoft enjoys a dominant market share in the basic tools white-collar business people use to get their job done, but other software packages have begun to nip at the heels of their dominance in many product lines.
Take Microsoft Office for example. Many businesses have started to use competitive offerings from Google and Apple. Even more companies cling to older versions of Microsoft Office software, even though Microsoft is keen to move everyone over to the cloud-based Office 365.
In purchasing LinkedIn, Microsoft saw an opportunity to suck data from LinkedIn into Microsoft’s cloud-based software applications, making them irresistible. Imagine you’re a sales person and you just landed a big meeting with a new prospect. You enter the appointment as a Microsoft Outlook event and suddenly the details of the event feature everything LinkedIn knows about your prospect.
Now you can make small talk about where they went to school, the previous jobs they have held and know the scope of their current role – all without ever leaving Outlook.
Microsoft is betting this kind of integration across its platforms will compel more people to upgrade to the latest software applications. While your company is likely smaller than LinkedIn, the same thing that makes a giant buy another giant holds true for smaller businesses. To get the highest possible price for your business, remember that companies make strategic acquisitions because they want to sell more of their stuff.
Read MoreDangers In Forming A Company Without Advising An Attorney
SECURITIES ISSUES FOR STARTUPS: CALIFORNIA LIMITED FILING EXEMPTION NOTICE
There are many dangers in forming a company without advising an attorney, such as failing to file a securities registration exemption with the California Department of Business Oversight (DBO) and federal Securities and Exchange Commission (SEC). The most common California exemption is the Limited Offering Exemption Notice (LOEN) under Corporations Code § 25102(f). This exemption is available if (a) the securities are sold to no more than 35 persons, (b) all purchasers have a preexisting personal or business relationship with the offeror or company (and other owners of the company), (c) all purchasers are not purchasing the security with a view to sell or distribute the security, and (d) the offer and sale are not accomplished by publication of any advertisement. Failure to file a LOEN within 15 calendar days from issuance of the securities may result in legal action from the Commissioner of Business Oversight, including civil penalties. Securities are typical considered issued upon the earlier of actual issuance, formation of your LLC or corporation, or execution of the Operating Agreement or Bylaws.
California law and the SEC clearly define a security as stock, so when forming a corporation, a LOEN must be filed. Despite federal law not specifically mentioning LLC membership interests, LLC interests are still subject to the federal Securities Act of 1933 because they are considered investment contracts (securities). The federal case SEC v. Howey, 328 U.S. 293 (1946) illustrates, “[a]n investment contract…means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or third party.” Corporations Code § 25019 reiterates this, indicating a “security” is any interest in an LLC “…except a membership interest in [an LLC] in which the person claiming this exception can prove that all of the members are actively engaged in the management of the [LLC].” English translation: LLC membership interests may be investment contracts, and therefore securities, when all members of an LLC are not involved in the management (the same is true for limited partnership interests). In this case, a registration exemption must be filed.
Besides California securities registration exemptions, registering the securities under the Securities Act of 1933 may be necessary. However, most securities issued upon the formation of a company are exempt from Regulation D of the Securities Act. A discussion of the federal securities registration exemptions is outside the scope of this material.
You should avoid the many pitfalls of using LegalZoom or any other service to form your company, and failing to file a securities registration exemption is one of many. If you have any questions about securities or entity formation issues, please do not hesitate to contact the Law Offices of Tyler Q. Dahl for a free consultation. 333 University Ave, Suite 200, Sacramento, CA 95825, 916-565-7455
Disclaimer: This material was prepared for general informational purposes only, and is not intended to create an attorney-client relationship and does not constitute legal advice. This material should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction. You should always consult a qualified attorney regarding any specific legal problem or matter.
Content provided by Law Offices of Tyler Q. Dahl
Read MoreBizBuySell’s Demographics of U.S. Small Business Buyers & Sellers
BizBuySell.com just released a special report from a survey with over 1700 small business sellers and 1300 prospective buyers. The report takes an in-depth look at the current small business for sale market including age, gender, ethnicity, motivations, military experience and more. Below are a few of the highlights from the report.
Sellers
- 49 percent of sellers plan to exit their small businesses in the next five years, but only 29 percent are currently prepared for the sale process.
- The number one motivation for purchasing a small business is the chance to be your own boss, cited by 63 percent of all buyers.
- Small business ownership tends to run in the family. More than one-third (39%) of sellers have a parent or grandparent who owned a small business; 16 percent have both a parent and grandparent business owner in their family tree.
- According to the survey respondents, nearly half of business owners (49%) plan to sell their small businesses in the next five years.
- What’s driving all of this desire to sell? Based on the large concentration of sellers in their 50s and 60s, it’s no surprise that retirement is the most common reason for planning an exit.
Buyers
- Most prospective buyers are currently employed full-time (64%), with small slices of the community retired (8%), out of work and actively seeking work (8%), self-employed (6%), employed part-time (5%), and out of work and not seeking a job (3%).
- Another common thread across many of today’s prospective buyers: they aren’t strangers to the small business life – almost half (46%) have owned a business before.
- Today’s prospective buyers are looking to make a move quickly, with 45 percent planning to purchase a small business in less than a year.
- Across the board, buyers express an interest in owning established or independently owned businesses, more so than new or existing franchises.
- 26% New Franchise
- 35% Existing Franchise
- 93% Established/Independently Owned Business
- Top Businesses Buyers desire by Sector:
- Restaurants 26%
- Retail 23%
- Internet Business 21%
- Manufacturing 20%
- Bars or Taverns 19%
To read the entire report click here.
source: bizbuysell.com
Read MoreDue Diligence Before You Sell Your Business
Due diligence is generally considered an activity that takes place as part of the selling process. It might be wise to take a look at the business from a “buyer’s perspective” in performing due diligence as part of an annual review of the business. Performing due diligence does two things: (1) It provides a valuable assessment of the business by company management, and (2) It offers the company an accurate profile of itself, just in case the decision is made to sell, or an acquirer suddenly appears at the door.
This process, when performed by a serious acquirer, is generally broken down into five basic areas:
• Marketing due diligence
• Financial due diligence
• Legal due diligence
• Environmental due diligence
• Management/Employee due diligence
Marketing Issues
It has been said that many company officers/CEOs have never taken a look at the broad picture of their industry; in other words, they know their customers, but not their industry. For example, here are just a few questions concerning the market that due diligence will help answer:
• What is the size of the market?
• Who are the industry leaders?
• Does the product or service have a life cycle?
• Who are the customers/clients, and what is the relationship?
• What’s the downside and the upside of the product/service? What is the risk and potential?
Financial Issues
Two important questions have to be answered before getting down to the basics of the financials: (1) Do the numbers really work? and (2) Are the seller’s claims supported by the figures? If the answer to both is yes, the following should be carefully reviewed:
• The accounts receivables
• The accounts payable
• The inventory
Legal Issues
Are contracts and agreements current? Are products patented, if necessary? How about copyrights and trademarks? What is the current status of any litigation? Are there any possible law suits on the horizon? What would an astute attorney representing a buyer want to see and would it be acceptable?
Environmental Issues
Not too long ago this area would have been a non-issue. Not any more! Current governmental guidelines can levy responsibility regarding environmental issues that existed prior to the current occupancy or ownership of the real estate. Possible acquirers – and lenders – are really “gun-shy” about these types of problems.
Management/Employee Issues
What employment agreements are in force? What family members are on the payroll? Who are the key people? In other words, who does what, why, and how much are they paid?
Operational Issues
The company should have a clear program covering how their products are handled from raw material to “out the door.” Service companies should also have a program covering how services are delivered from initial customer contact through delivery of the services.
The question is, do you give your company a “physical” now, or do you wait until someone else does it for you – with a lot riding on the line? An intermediary can work with you to help look at your business from the lens of a buyer.
Read MoreSMALL BUSINESS PERSONAL GOODWILL: WHO OWNS IT?
Personal Goodwill has always been a fascinating subject, impacting the sale of many small to medium-sized businesses – and possibly even larger companies. How is personal goodwill developed? An individual starts a business and, during the process, builds one or more of the following:
• A positive personal reputation
• A personal relationship with many of the largest customers and/or suppliers
• Company products, publications, etc., as the sole author, designer, or inventor
The creation of personal goodwill occurs far beyond just customers and suppliers. Over the years, personal goodwill has been established through relationships with tax advisors, doctors, dentists, attorneys, and other personal service providers. While these relationships are wonderful benefits, they are, unfortunately, non-transferable. There is an old saying: In businesses built around personal goodwill, the goodwill goes home at night.
It can be difficult to sell a business, regardless of size, where personal goodwill plays an integral role in the business’ success. The larger the business, the less likely that one person holds the key to its profitability. In small to medium-sized businesses, personal goodwill can be a crucial ingredient. A buyer certainly has to consider it when considering whether to buy such a business.
In the case of the sale of a medical, accounting, or legal practice, existing clients/patients may visit a new owner of the same practice; they are used to coming to that location, they have an immediate problem, or they have some other practical reason for staying with the same practice. However, if existing clients or patients don’t like the new owner, or they don’t feel that their needs were handled the way the old owner cared for them, they may look for a new provider. The new owner might be as competent as, or more competent than, his predecessor, but chemistry, or the lack of it, can supersede competency in the eyes of a customer.
Businesses centered on the goodwill of the owner can certainly be sold, but usually the buyer will want some protection in case business is lost with the departure of the seller. One simple method requires the seller to stay for a sufficient period after the sale to allow him or her to work with the new owner and slowly transfer the goodwill. No doubt, some goodwill will be lost, but that expectation should be built into the price.
Another approach uses some form of “earnout.” At the end of the year, the lost business that can be attributed to the goodwill of the seller is tallied. A percentage is then subtracted from monies owed to the seller, or funds from the down payment are placed in escrow, and adjustments are made from that source.
Who owns the goodwill in your business…. you or the company? From a buyers perspective your business will have more value the more the company owns the goodwill vs. the owner of the business.
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