Recently, the Small Business Administration (SBA) made a few changes to the approval process for SBA loans that are combined with Rollovers for Business Start-ups (ROBS) as the equity injection. All newly originated SBA loans that use Rollovers for Business Start-ups must be sent through the general SBA approval process to secure the guarantee of funds, including the submission of a full package to the SBA office for approval. This procedure is true for everyone, regardless if a lender has Preferred Lender Program (PLP) status. Our sources have confirmed that this change is effective immediately and will remain in place until the 2020 standard operating procedures are finalized.
What is ROBS?
ROBS stands for Rollovers for Business Start-ups. Many of us think of “rollovers” in connection with “rolling over” retirement accounts. In a ROBS transaction, funds from eligible retirement accounts, including 401(k) or traditional individual retirement accounts, are rolled over and invested into a business. That may mean investing in a new business or franchise, or buying or putting money into an existing business.
Here is how the transaction works:
– A C corporation — a corporate structure that allows shareholders — is formed
– A new 401(k) plan is created for that business
– The owner’s existing retirement accounts are rolled into the new 401(k) plan
– The rolled-over funds are used to purchase company stock in the C corporation
– The proceeds from the sale of stock provides the cash that is invested into the business
While not without risk (the owner is risking their retirement savings), ROBS provides an alternative way to finance a business without taking on debt, paying withdrawal penalties, or being taxed on the funds.
How will this change affect the SBA loan process?
Due to this change in procedure, any newly originated SBA loans that use a ROBS transaction for equity may take up to four to six weeks longer than normal to be approved.
Doug Whalen, Head of SBA Lending at Bryn Mawr Trust, was asked for his thoughts on the new change. He was quoted as saying: “This is a very significant move for the SBA to require ROBS transactions to be submitted to the SBA. Currently, there are only a limited amount of circumstances where Preferred SBA Lenders must submit a loan to the SBA for approval. The SBA must have a compelling reason or major concern regarding the ROBS process and how it impacts SBA loans. We are looking into the specifics of this new rule; however, the SBA historically has considered business acquisitions to be start-ups. Unfortunately, buyers using the ROBS process to meet the equity injection requirement for a business acquisition may find themselves to be a less attractive option when competing against other interested buyers who are not using the ROBS process. It will be interesting to see if the SBA makes a distinction for business acquisitions.”
Please note that the approval process for any newly originated SBA loan without ROBS has not changed.
If you are preparing to sell your first business or make your first major purchase, we can support you throughout the process. Symmetrical assists Middle Market companies strategically assess their needs and prepare for big transitions. Contact us for a confidential discussion about how we can help.
Sixty percent of Middle Market companies report that inorganic growth is a key part of their growth strategy, according to research by the National Center for the Middle Market. Each year, approximately 20 percent of Middle Market firms acquire a company and roughly five percent sell or divest part of their organization. The executives of the companies surveyed expect merger and acquisition activity to drive more than a quarter of their growth. Despite this reliance on inorganic growth, most Middle Market companies reported minimal M&A experience and multiple struggles with the process.
Inexperience makes M&A process seem more difficult
Of the companies surveyed that had completed a purchase in the last three years, almost one third (29 percent) were completely new to the process and an additional 40 percent had limited previous experience. For companies on the selling side, only one in ten companies reported any significant previous sales experience. With so many leadership teams being completely new to the M&A process, it is no wonder that more than 40 percent of buyers and 50 percent of sellers considered business valuation and assessment to be extremely difficult. Similarly, 44 percent of both buyers and sellers reported that post-transaction integration was a major challenge (i.e. integrating technology systems, administrative processes, staff, and culture).
Experienced advisors increase the likelihood of a successful deal
Fortunately, there is one clear cut way for Middle Market companies to increase the likelihood of M&A success. Ask for help! According to the same research, Middle Market organizations tend to turn to internal executives or top managers to begin the M&A process. Only one-third of buyers looked for targets with help from an external law firm and fewer worked with consultants or investment bankers. Sellers were even less likely to work with external experts when looking for buyers.
Turning only to internal leadership when beginning an M&A journey is very limiting. External experts have access to experience, expertise, and resources that dramatically increase the likelihood of a successful and profitable transaction for all involved. They also introduce the very necessary quality of objectivity into the process, which is absent when deals are kept entirely in-house.
Symmetrical helps Middle Market companies to strategically assess their needs and prepare for big transitions. If you are considering buying or selling a business, please contact us for a confidential discussion about how we can help.
Some entrepreneurs start their businesses with dreams of eventually selling to a larger company, enjoying the payout as part of their retirement or using it to fund their next venture. Other business leaders dream of something longer lasting – a business that will live beyond them and last for generations to come. Seeing that dream come to fruition requires a different mindset and skillset than a “sell and move on” exit strategy. If you envision your middle market business lasting for generations, here are some things to consider in today’s business environment.
Embrace transparency
First generation business owners, particularly leading family businesses, have a tendency to keep some information close to their vest. Unfortunately, that is one of the biggest mistakes you can make when passing a company on to the next generation. Focusing on transparency early, well before a major transition is imminent, is one of the wisest things a business leader can do. The organization as a whole benefits from improved knowledge transfer and the ability to catch challenges before they become problems.
Prepare for the generational shift
We are about to witness one of the most powerful shifts in business ownership to occur in recent history. Baby Boomers (those born between 1946 and 1964) represent close to 75 million people in the United States today. About 4 million Baby Boomers leave the workforce each year. This is a major concern for business leaders, considering Boomers make up a quarter of the country’s workforce and many hold leadership positions. The businesses that continue to thrive through this period will be the ones that are deliberate in connecting across generations. If your organization is primarily made up of one generation, proactively seeking a wider variety of employees and perspectives is a great place to start.
Fix anything that is broken now
As you begin to increase transparency in your organization and prepare for the coming generational shift, it is likely that you have or will identify weak points… areas in your organization that require improvement. One of the biggest mistakes leaders make is putting off those corrections. Organizations that last for multiple generations are organizations that have learned to be resilient and are skilled at evolving well. Start now.
If your dream for your company is longevity, we have experience that can help. Our team assists Middle Market companies strategically assess their options and prepare for big transitions. Please contact us for a confidential discussion about how we can help you.
When an owner starts to think about selling their company, they don’t dream about being on the market for years or about knocking on doors for the right buyer. Instead, we all dream about the day when the perfect buyer shows up in our lobby begging for a meeting.
For most companies, the reality is somewhere in between the two. But leaders who do the right planning up front set themselves up for greater success and increase their chances of attracting the right investors to their company. When the right buyer looks at your company, you want them to see something enticing right from their first glance. Creating a great first impression takes a little prep work.
Think like a start-up: Clearly define and communicate your story
First, try to think of your company like a start-up. Many start-ups raise money before they have established sales. How? By selling their story. Your company has a brand and story as well. Now is the time to define it, before you meet with any potential buyers. Is your story inspiring? Is there potential for growth? Does it sound like a story that would intrigue your ideal buyer?
Once you have a compelling story, the next step is to clearly communicate it across all of your marketing channels. Buyers are busy and they look at hundreds of companies. Assume that they will make a snap judgement about your company after only a quick first impression. Utilize your website, social media accounts, and marketing collateral to share your brand story. No matter how your ideal buyer finds your company, you want them to encounter the same consistent messaging to capture their interest.
Prepare like a pro: Develop your prospectus before you have an interested investor
Second, pretend you already have an interested investor on the phone and prepare your prospectus now. A prospectus is a detailed 15- to 40-page document that outlines what your business does, how it makes money, and how it operates. It also includes data about market trends, growth opportunities, and frequently asked questions about the company. Having a completed prospectus ready to go means you won’t have to panic or scramble when investors knock on your door, avoiding costly delays or loss of interest.
Do due diligence now: Understand your business’s strengths and weaknesses
Third, review everything a potential investor would want to see before they ask to see it. This should include (but is not limited to):
– historical profit and loss data
– historical balance sheet
– summary of your financials (tax returns, bank statements, and merchant statements)
– customer lists
– a staff list
– suppliers’ names and information
Buyers may ask for interviews with staff, clients, and subcontractors. They may ask to see the contracts suppliers and staff have signed, as well as contracts for any business systems and vendors, etc. Being organized and prepared before due diligence starts means two things. First, you’ll have identified your strengths and weaknesses in advance, and have the opportunity to correct blemishes before they become visible to a potential investor. Second, your prepared team will be ready to respond to a potential buyer much faster than an unprepared team, giving you an advantage.
Once you have completed your prep work, potential investors will be able to quickly look at your organization and understand if it may fit their goals. Your business will be organized, interested, and ready to sell when the right opportunity comes along. Feeling overwhelmed? We can help. Our team helps Middle Market companies strategically assess their options and prepare for big transitions. Please contact us for a confidential discussion about how we can help you.
Traditionally, private equity firms that specialize in company buyouts have followed a predictable timeline. The sponsor acquires a new company with the goal of selling it profitably after a three- to five-year holding period. Several experts in the industry are predicting that a significantly longer holding period may start to become just as common.
Short holding periods have drawbacks
While the three- to five-year holding period has been standard, it does have some negatives. First, it generates recurring costs for the funds and the limited partners (LPs) that invest in them, as well as recurring hunts for new assets by general partners (GPs). Second, it minimizes some flexibility on the investment, for example, when the sponsor sells right away, after the short holding period, even though it might be more profitable to hold on longer for more optimal market conditions.
Longer holding periods are emerging
As discussed in Bain’s recently released Global Private Equity Report 2018, several large PE firms have been launching buyout funds with longer lives. One firm raised $5 billion for a fund with expected holding periods of approximately six- to 10-years, or roughly double those of the traditional buyout fund. Two other first-time funds, each raising more than $1 billion each, have anticipated holding periods of up to 15 years.
Why the change? Besides avoiding the drawbacks mentioned above, longer hold periods enable:
– Lower transaction costs, such as consultant fees
– Deferred taxation of capital gains, allowing the capital to grow over time
– Fewer distractions for portfolio company management
– More flexibility, allowing funds to sell when the time is right
– Longer holding periods ensure that all debt is relieved and balance sheets balloon
– Add-ons, add-ons, add-ons…
Of course, longer holding periods are more ideal for some industries than others. The technology space, for example, where the regulations, industry landscape, and competitive threats change quickly, may not lend itself to longer hold periods. In fast changing industries, fund managers will likely need to complete re-diligence on a regular basis, to ensure an updated understanding of the industry and the competitive positioning.
We can guide you through this process and help you to understand how your company may fit into the bigger picture of PE funds and their investors. Please contact us for a confidential discussion.
Whether you have just started to explore selling your company or if you’ve been preparing to sell for a while, it is likely that you’ve daydreamed about catching the really big fish… a large buyer who will swoop in and instantly see the value in your business model and won’t balk at your asking price.
“Luck is a matter of preparation meeting opportunity.” Lucius Annaeus Seneca
You won’t catch the big fish if you aren’t ready to. The sellers who “luck” into deals with large acquirers were able to take advantage of that opportunity because they knew the type of buyers they were targeting, they knew what those buyers look for in an acquisition, and they were prepared to fit that profile.
Identify your big fish
In your daydreams, who is your biggest fish? To choose your dream target buyers consider your industry, geographical region, differentiators, customer base, and other M&A activity that has occurred in your space. Think big. Once you have a long list of fish, narrow it down to your top three dream targets. Now learn about them – where are they, what purchases have they made in the past, and what seems to motivate them? If you were actually fishing, you wouldn’t guess about where to go. You’d know the type of fish you wanted to catch, where they are, and a little bit about them.
Know what they are looking for
You can’t catch a fish if you don’t know what they want to eat. In general, most buyers want to see four things:
1. Long term dedication/experience – That may mean an established track record in the industry, an experienced management team, a proven product, or all of the above.
2. Past growth – Buyers want a business that has shown growth, both from a profit standpoint and a business evolution standpoint
3. Future growth – Along those same lines, a buyer wants to purchase a business with growth potential, supported by accurate projections and marketplace assessment
4. Buyer ready – Sellers earn bonus points by being ready to sell. A big part of that is completing your due diligence in advance. The smoother and quicker you can make the diligence process, the more likely you’ll be to close a transaction under your original terms.
Be what they are looking for
It is one thing for you to have the right bait for the right fish. It is another thing for that fish to find the bait. Now that you know who your ideal buyers are and what they want, you need to communicate that you have what they need. Start with an evaluation of all of your external communications. If a potential buyer stumbles on to your website, will your business look like a good acquisition for them?
If you have questions on how to net the biggest fish to acquire or recapitalize your business, please contact us for a confidential discussion.
In recent news, outlets are reporting that there may only be one interest rate hike in 2019, in part due to the partial shutdown of the U.S. government, which has left hundreds of thousands of federal employees without a paycheck.
How do interest rate changes affect small to midsize business owners?
If you’re a business owner, aspire to be one, or work with business owners regularly, then you must understand the major ways that interest rate changes affect how companies operate.
1. High Interest Rates Make it Harder for Business Owners to Get Loans
Most small to midsize businesses have outstanding loans, and when interest rates rise, it is more expensive to pay them off. Further affecting future growth, raising interest rates make it more difficult to take out new short-term loans to help pay for unexpected expenses or to expand when necessary.
2. High Interest Rates Lower Consumer Confidence
When interest rates rise, consumers will have to pay more to lenders to repay their loans. This mean less disposable income left in their bank accounts to spend on products and services. Business owners providing luxury items may be hit harder than a company supplying basic staples.
What can business owners do now to prepare for the potential of rising rates?
1. Focus on Building Your Business Credit History
Having a strong business credit history means options: you can choose the lenders, creditors, and vendors your business works with. This allows for greater control over your business’ cash flow.
2. Review Future Growth Projections
Consider future rates when planning future growth projections, particularly those that will rely on a project funded by a loan. Even a 1% different in interest rates can make a significant difference in the price of the loan, and therefore the value of the project.
3. Review Current Terms of Your Outstanding Loans
Take time to review all of your current business loans now. Understand which loans could be affected by a rise in interest rates (due to a variable rate, for example).
If you need any assistance thinking through what interest rate increases mean for your business, don’t hesitate to reach out to us.
Sources:
For many business owners, their business is their largest asset, so it’s normal to want to understand its worth. The problem is that it’s not always as straightforward as applying a simple calculation. Valuing a business is subjective, and two people could see the same set of company financials and arrive at vastly different valuations.
There are many reasons a business owner may need to know its current value, including if they want to sell the business and retire, or to obtain debt or equity financing. No matter the reason, valuing your business depends on many different factors.
Let’s review some of the most common business valuation techniques.
Assets-based approaches
Sometimes referred to as the cost-based methods, this is the most basic way to value a business. Essentially, you are taking the value of the business’ hard assets and subtracting the debts.
Assets-based valuations can be done one of two ways:
– A going concern asset-based approach will list the business’ net balance sheet value of its assets and subtract the value of its liabilities
– A liquidation asset-based approach will determine the net cash that would be received if all of the business’ assets were sold, and its liabilities paid off
While straightforward, this method often renders the lowest value for the company because it does not account for “goodwill”. Because of this, one of the two methods described below may yield a higher valuation.
Earning value approaches
This method follows the idea that the business’ true value lies in its ability to produce wealth in the future; essentially the buyer is estimating what your future cash flow is worth to them today.
The valuator determines an expected level of future cash flow using the business’ past earnings (taking into account unusual expenses or revenue), and multiplies this number by a capitalization factor. The capitalization factor reflects the expected rate of return the buyer should expect in the future.
Market value approaches
In this method, the valuator will establish the value of a business by comparing it to other similar businesses (“comparables”) that have recently sold. Of course, there must be a reasonable number of very similar comps that have sold within your industry to be able to use this method, which is not always the case with privately held companies.
It’s important to focus on more than one facet, such as industry, when looking at comparables. For example, a small ecommerce company cannot base its value off of Amazon, just as an internet startup cannot base its value off of what Facebook is trading at.
The earning value approaches are the most popular business valuation method used, although some combination of approaches may be a better fit. The first step in determining the true value is to hire a professional. As part of our process, we offer a detailed valuation / transaction analysis at no cost to owners considering their options for the business. If you’d like to learn more, contact our team.
Managing Partner Chad Byers was a guest on Behind the Numbers with host Dave Bookbinder.
In the segment, Chad provides business owners with tips to create value and increase their net worth. He reviews best practices, including understanding the value of your business, running your business as if you’re looking to sell it, and buying your real estate.
View the full video:
In February, we predicted that 2018 would be a big year for middle market M&A, especially for those on the sell side. With the second quarter coming to an end, it’s looking like our prediction will play out.
Valuations remain high due to persistent economic optimism. Meanwhile, the middle market transaction count continues to rise despite high valuations, indicating that investors continue to make acquisitions.
The takeaway? This year is a fantastic year for a business owner looking to sell.
First Quarter Dip
Looking at the data, there is a noticeable dip in transaction count and volume in the first quarter from the fourth quarter of last year. However, this isn’t an indication of a down year, as M&A activity usually peaks at the end of the year and starts slow the next year.
We fully expect activity to pick up for the remainder of 2018, and so do middle market funds who are fundraising at historic levels to complete deals.
Baby Boomers, IT, and Healthcare
The primary reasons that activity will be high throughout the rest of the year are baby boomer retirement and IT sector and healthcare sector growth.
Private equity buyers have a continuously replenished market of prospects as baby boomers retire at a rate of 10,000 per day. The seemingly endless supply of available acquisitions is keeping middle market funds in constant competition to boost their portfolio during this time of growth and while they have the funding to support it. Family businesses are some of the biggest beneficiaries as their aging owners start to look for an exit strategy and buyers ready and willing to make a deal.
Meanwhile, the U.S. economy is seeing sustained growth in the IT and medical industries, and that growth is reflected in their respective M&A markets. According to Pitchbook’s recent first quarter middle market M&A report, 2017 was the first year that there were more IT sector deals than B2C sector deals. We’ve also already noted the demand for medical practices among PE firms who are gobbling up small practices in order to combine them into more efficient, patient-focused businesses.
It Won’t Last Forever
However, valuations can’t maintain this trajectory, and we are seeing economic volatility creep its way back into equity markets. As we’ve recently discussed, the probability of a recession in the next one-to-two years is increasing.
Business owners should keep in mind the fact that the good times don’t last forever, and that holds true for middle market M&A as well.
Sell High
So, our advice is to take advantage of the market’s optimism while the opportunity is so obviously presenting itself. If you’re a business owner considering divesting or selling, now is the time to confidentially discuss your options with us. Contact us today.