Posts Tagged ‘small business’

Before Seeing Your Banker About Business Acquisition Financing, Perhaps You Should First Talk To the Vendor

More and more business acquisition financing is provided by the actual vendor or seller, not just your banker. And in many cases, bankers will not even entertain providing acquisition financing unless the vendor is contributing some amount of financing as well.

This is especially true with purchasing a small business where a good portion of the sale price is tied up in Goodwill. Most lenders will not finance 100% of the goodwill. Actually, most lenders won’t finance any goodwill without some amount of additional security, guarantee, or surety from the buyer.

The lenders logic is that if the vendor is so certain that the value for goodwill in the purchase price is valid, then they should have no problem providing the financing by basically deferring the portion of the proceeds earmarked to goodwill until an agreed upon time in the future.

There are a couple of other reasons why vendor financing is more common for acquisition financing than you may think.

First, any purchase and sale agreement I’ve ever seen always has some form of recourse present to protect the buyer against mispresentations of the seller and vise versa. By having the vendor provide some amount of financing towards the purchase, there is effectively a recourse fund in place which further protects both the buyer and any potential lender that also gets involved.

Second, by having an active stake in the business being sold in the form of a vendor loan , the vendor is highly motivated to provide a seamless transition to the new buyer as well as ongoing support if required.

Many times, the vendor will take the money and run after the completion of sale and payment of all the proceeds, leaving the buyer to deal with any unknowns or transitional problems that might arise. And depending on whose statistics you subscribe to, one of the top reasons for the failure of acquired businesses is due to poor ownership and management transition.

Vendors tend to not want to provide financing if they don’t have to, which only makes sense. However, failure to be open to vendor financing can also leave businesses unsold for several years as potential buyers are not able to secure enough lender financing without the vendor being involved.

Technorati Tags: business acquisition financing, buyer, finance, lender, seller, small business, vendor

Several times each week, I talk to small business owners who are seeking capital for their new or existing business and several times I have a very similar conversation with each of them that I thought I’d share today.

At the beginning of the conversation, I always ask the same two questions:  How much money are you looking for? what’s the purpose of the funds?

I would say that at least 75% of the time, I have to re-ask these two questions two or three times before they’re answered.  Most people think that telling me a long drawn out story of what they want to do and how they came to do it will be more important than answering these two questions.

What tends to come out after a few minutes is that the individual is hunting for what I call stupid money.  You know, the kind that is prepared to write you a check on a very thin and likely non existent business plan where the lender is taking all or close to all of the financial risk.

Example.  Someone has a great idea for a tennis equipment store.  They have picked out a location and now need $300,000 for start up costs, working capital, and inventory.  They have poor credit, personal debt, zero net worth, and no capital to contribute to the venture.

Is it possible that this individual could secure small business financing of some sort? Yes.

Is it probable? No.

That’s the great thing about the money business, virtually anything is possible, and I’ve seen enough to know first hand.  After getting off the phone with me, this would be entrepreneur could go to the coffee shop, strike up a conversation with someone about his or her golf shop idea, and leave with a check in hand for the capital sought.  Is is possible?  Absolutely.  Is it likely to occur?  The odds would likely be lower than playing the lotto.

That’s why I’m always careful to not generalize about small Business Financing, as there is an infinite sea of money out there and strange things happen all the time.

But lets also get real.  Just because its possible, doesn’t mean your new business financing strategy is to start going to coffee shops.

For the most part (can never generalize), money has a basic intelligence.  If intelligence is not applied, the source of money will disappear very quickly based on making bad decisions.

People supply money to business ventures for a return.  If you can show them a path to the return they seek within the level of risk they’re prepared to take, then eventually, you will find a source of capital for your small business financing requirements.

And here’s my tip of the day on this subject:  You must have something to leverage and something to lose in order to have a realistic probability of getting business financing, whether it be for a new venture or existing business.

Something to leverage for low risk credit is your credit score, personal net worth, external cash flow, third party guarantee.  Something to leverage for higher levels of credit risk would also include things like asset security, established cash flow, signed purchase orders from reputable companies, patents, intellectual property, contracts, etc.  Remember also that something to leverage has to have a value to the source of money or there is no leverage.

Something to lose is at the very least the capital that you directly invest into the venture.  100% financing of anything is quite rare unless you’re taking about residential real estate and look what problems that has caused in the markets over time.  Personal guarantees and corporate guarantees would also fall in this category if there was enough net worth to make them meaningful.

As the amount of leverage and borrower risk increases, so does the probability of securing capital.

Technorati Tags: capital, commercial, finance, financing, loan, loans, small business

The question of how to secure capital for your business is commonly asked and pondered by most small and medium sized business owners and managers at one time or another.

When you search the internet for the answer, you tend to get the same lame regurgitation of things like new businesses should look to friends, family, and fools for capital; existing businesses should look to banks; and that you need to consider debt financing versus equity financing that gets into the whole venture capital versus angel investor rhetoric.

Wow.  Really revolutionary and informative information.  Some even go so far as to say these are secrets if you can believe it.

Now I’m not implying that these various terms I just threw out don’t need to be explained or are not important.  No sir/madam.  I’m merely saying that all these terms with some amount of abbreviated explanation are thrown at you like a bucket of water in some weak attempt to answer the question.

Perhaps its because the generic answer set I’ve outlined is pretty basic and safe and even friendly.

But useful?

Instead of starting at the beginning, lets start at the end.  A bad ending.  Depending on whose stats you read, over 50% of businesses will fail, fold, go kaput in less than 5 years of existence.  Whether its 43.7% or 71.2% that fail in 5 years doesn’t really matter.  The point here is that its a lot and its alarmingly high.

So, why is it so high and what that got to do with securing capital?  Answer, it has everything to do with securing capital.

The internet for one is awash with people looking for money to finance their business ventures, either start up or existing, and most of the solutions that they come across are geared towards lending them money based on nothing to do with their business.

Business Financing in large part, is not based on business.  Its based on personal credit, personal net worth, liquidatable (new word) assets, third party guarantees, government grants and guarantees, etc.   This applies not just for start ups, but for existing businesses as well.

The point (yes I do have a point) here is that if you try hard enough, you can probably find someone to give you some money for what you’re trying to accomplish that you say requires capital.

But your ability to be successful is dependent on 1) having a tested business model; 2) having a tested marketing approach and position; 3) having enough necessary experience, or access to the necessary experience for the venture, and finally 4) accurately estimating the capital required to become cash flow positive (business can generate enough cash to pay bills and generate a return on the capital you secured) including a substantial contingency plan for all the things that may go wrong along the way.

If  you don’t complete the above 4 points, my first question to you would be, how do you know how much capital you really need?  My second question would be, if you don’t Secure Capital sufficient to complete whatever you’re starting (your estimate was out and now you’re short), what are you going to do?

So how to secure capital for your business starts with how much capital do you need and is that much capital going to be able to generate a return based on your plan of attack.

In most business failures, if they did the exercise first (honestly and objectively at the very beginning), they wouldn’t need to secure capital because they’d find so many holes in their own logic and planning that they’d stop and revise things until they made more sense.

I’m not saying planning is perfect, because its not.  And no amount of basic planning and analysis will stop business failure.   But I’m telling you, its not going to be anywhere near 50% either.

The final point today is that when you make the effort and figure out what business approach should work (and I do say should as planning is imperfect) and clearly outline the capital you need to secure, you will not only have an easier time securing business capital (well thought out plans have a higher probability of getting funded), but you’re also more likely to meet or exceed your profit expectations (well thought out plans have a higher probability of making money).

We’ll get into a lot more on how to secure business capital as there can be a lot to it, depending on what you’re trying to do.

But the starting point is not “where do I apply?”, or “what tricky things can I do to get an application approved?”

If you that’s where you want to start, you’re looking to become another statistic.

Technorati Tags: business, debt, equity, financing, loan, Secure Capital, small business, working capital

In part I, we started into the discussion of why business finance tends to be difficult to understand for most people, even though its relevant to everyone to some degree.  Now, let me get into how this relates to you as a business owner or business manager.

I left off talking about the apparent communication gap between finance tacticians and the rest of the world.

I also mentioned how when you’re in business for yourself or managing business for others, you can be very much at the mercy of your advisers when it comes to matters of finance.

Does this mean you shouldn’t utilize advisers?  No, I’m definitely not saying that.  Experts in various financing disciplines can be absolutely critical to your business success.

So, lets summarize what we know so far.

-  Business finance can be hard to understand, comprehend, and apply.
-  Its an essential part of any business venture
-  Leaving too much decision making up to your advisers can be dangerous.
- There is a long standing communication gap between finance experts and  everyone else.
-  99.9% of the world have a very limited understanding of finance, how it works, and how they can more effectively utilize it to increase their wealth.

From a business ownership/management point of view, there should be a strong motivation to correct this trend, and I think there is, but few people understand how and continue to muddle through what already doesn’t work very well.

So what’s the solution?

Like anything else in business, the owners and managers of any business need to control and direct the forces of the business to be successful.  When it comes to finance, its hardly practical to advise or expect non financial managers to develop a deep understanding of business finance in order to get greater value.

Most Entrepreneurs will have a primary focus on marketing, which they should as marketing is the #1 most important activity in a business.  But finance is #2 , and is the counter balance for marketing.  Look at any large scale business and see how they’re organized – marketing on one side, finance on the other.

So the answer is not to become expert at something you may not be good at or have an aptitude for (basically going against your wiring).

The answer lies in your approach and commitment to maintaining the necessary chi like balance between #1 and #2.

Can I have a drum roll please.

The secret to optimizing the finance component of your business is to connect all finance activities  into the three core business finance objectives that apply to any and all businesses regardless of size, structure, or country of origin and then make sure they are congruent and supportive of the overall business objectives of the organization.

Wow, that’s a mouth full.  And hardly more enlightening at this point.

But stay with me as all will be explained in the next segment.

I will reveal these three core Business Finance objectives in part III and further explain how they relate to the broader organizational objectives (and show you that its not even that hard to do once its been explained in a little more detail).

Technorati Tags: Business Finance, commercial, financing, small business, sme