If you’ve ever gotten any type of substantial loan, chances are that you’re already familiar with the concept of collateral. This is when something of value is pledged as security. As a result, the lender has something of value that they could potentially take if the loan is not repaid. Collateral is designed to protect the lender. Of course, the most common example of collateral is your house when you have a mortgage.
Oftentimes, those looking for a loan to buy a small business wonder if they can do so if they have no collateral. Let’s take a closer look at some of the most popular options in this situation.
The 7(a) Loan Assistance Program
If you’re lacking collateral and looking for a business loan, it’s a good idea to check with the Small Business Administration. The SBA 7(a) loan is one of their most popular programs. While it can be used for establishing or acquiring a new business, it’s also commonly used for long and short-term working capital, refinancing business debt, or the purchase of real estate or equipment.
The SBA guarantees up to 75 percent of the amount of the loan if you can contribute 25 percent of the money. This can be a very good option for buyers who don’t want to contribute collateral. You can even use cash that came as a gift from investors. As a result, this program is frequently used by first time business owners. More information is available here: https://www.sba.gov/funding-programs/loans/7a-loans.
One thing you’ll want to note about the 7(a)-loan program is that the seller will not be able to receive payments for two years. As a result, the seller may request or require some other kind of incentive.
Seller Financing Options
Seller Financing happens more often than you would think and is another great way of buying a business without collateral. Most sellers are motivated and will agree to help with financing. Some buyers have even combined SBA loan 7(a) program with seller financing for maximum results.
If you are looking for creative financing options, be sure to talk to your business broker or M&A advisor about the specifics of your situation. You can also look to S.C.O.R.E to receive information about best practices for proceeding.
If you’re looking to buy a business and have no collateral, just remember that people use ingenuity to buy businesses every day. You just need to set your goal and be determined to reach it.
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A partnership agreement is a legal document that provides an outline of how a business will be run. This agreement will often be used by small for-profit businesses when two or more people are involved. It’s an essential document to have, especially in the case when a dispute arises between partners. Even if you have gone into business with a friend or relative, you should have this document in place to make sure everyone is protected. Let’s take a look at some of the key elements that should be in this document.
It goes without saying that your partnership agreement should include the basics, such as the name of the business and the names of key parties involved. You’ll also want to outline the goals of your partnership and how long it will last.
Rules and Responsibilities
When you create your partnership agreement, you’ll want to make sure it offers a lot of clarity on different points with an eye to everyone’s responsibilities. Think through what concerns or disagreements could possibly arise and then outline how you would solve them.
You’ll want to cover everything involving finances in your agreement. This should include key points on income and how it will be distributed. You will also want to clearly outline the ownership interests of each partner involved. Also be sure that the agreement includes the accounting obligations of the partners, and how you’ll handle salaries, vacation, sick leave, etc. Also think about the funds that will be necessary to operate the business. Who will be contributing these funds?
Partners and Staff
The partnership agreement should also cover points involving the work itself. Who is in charge of managing your staff? What kind of authority role does each partner have? What if you decide to bring in a new partner? The agreement should discuss the procedure for adding people to your partnership and what that entails.
Issues Involving Key Decisions
Another important issue to explore and detail in the agreement relates to decision making. How will your company make its business decisions? What will occur if a conflict cannot be resolved? Will you go to court or take another route? What if the partnership was terminated? What would the terms and conditions of your termination be?
When your partnership agreement is under your belt, it should empower you to feel confident in the core structure of your business and its ability to function smoothly.
Obviously, you’ll want to avoid the DIY approach and instead work with an experienced attorney. While it might take more time and money to do so, you’ll be glad that you hired a professional if and when you run into conflicts down the line. Your business broker or M&A advisor should be able to recommend a lawyer who has experience crafting partnership agreements.
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BizBuySell just released its latest insight report, which tracked sales and growth in 2022 and compared it to the prior year. Overall, we are seeing a high demand for service-based businesses as well as an increase in restaurant business sales. The insight report also reveals what business brokers across the country are expecting for 2023 and beyond.
Data on Service Business Sales
In 2022, 39% of the acquisitions tracked by BizBuySell were service businesses, and their transactions were 7% higher than 2021. The service sector typically includes predominantly financial and healthcare related businesses. These types of companies are usually considered to be low-risk.
Across the map, buyers were willing to pay more for service businesses last year. In fact, the median sales price for service businesses rose 4% over 2021. It’s interesting to note that the sales prices were even higher than the pre-pandemic levels. Also, there is a trend towards buyers seeking out socially responsible and environmentally conscious businesses.
Data on Restaurant Businesses
Restaurant businesses also did quite well in 2022. In fact, the acquisitions of restaurants jumped 20% over 2021. They previously had plummeted 38% in 2020. While these numbers are strong, they are still 21% lower than before COVID.
Restaurant businesses also had less time on the market. The median days were 169 instead of 176 the year before. Restaurants also sold for more money. The median revenue for closed transactions was up 7% and the cash flow was up 13%. It seems that the general consensus is that dining out is popular again after years of struggles due to people avoiding meals in public.
Expectations for 2023
The conclusion of this data collected about 2022 is that buyers no longer will benefit from sitting it out. Higher interest rates are expected to be more and more of an impact for buyers in 2023. The good news is that most experts are expecting rates to get better in 2024.
Business brokers surveyed by BizBuySell expect that the market in 2023 will continue at the same place as it did in 2022. Many sellers will seek to retire. The concern of a recession should also motivate more baby boomers to sell. In fact, 45% of owners are saying they are selling to retire. At the same time, buyers will be looking for profitable companies that will grow.
The data revealed by BizBuySell indicates that those who are buying businesses may currently have the upper hand. In fact, 47% of brokers say that their view is that the market has shifted towards buyers. They attribute this to rate increases. They are finding that the majority of buyers are saying that current businesses are overpriced.
Sellers Must Be Flexible
The insight report shows that overall business brokers believe there is pressure on sellers to be more flexible in their pricing and terms. As always, seller financing is essential. In fact, 90% of buyers are saying it’s important for owners to offer this option to them. 95% of brokers echo this sentiment.
It should come as no surprise that businesses with strong financials are in high demand. When these businesses are considered recession proof, this fact is even more true. But even sellers with the strongest businesses may still have to consider offering financing or adjust prices due to the higher rates. Sellers who want to sell in the near future, of course, should begin preparing their exit now.
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When you are looking to sell, always focus on the positive aspects of your business. Many business owners fail to properly make a case for the benefits of their businesses to prospective buyers. Be sure to make it clear that your business has stability and ample financial health. Let’s take a closer look.
1. Prepare in Advance
Preparing paperwork in advance will help to make sure that everything is in proper order and you’re not scrambling at the last moment. When your records are organized and correct, your prospective buyer will be able to truly see the value of your business. Buyers will also like to know that you have robust accounting processes that they can rely on in the future.
You should also make sure that inventory is in stock and that any necessary upkeep has been done. All of these updates are part of the big picture when it comes to presenting your business in the best light to buyers.
2. Reveal Your Methods of Operations
You’ll also want to demonstrate that you have a solid formula for a successful business. Buyers love to see items in place like procedures manuals, as they reveal the routine tasks necessary to run the business. Anything you can provide that will help the buyer understand how to successfully run your business will help them understand its advantages.
3. Keep Things Consistent
During the sales process, you’ll want to be sure to maintain regular operations. If prospective buyers see any kind of dip in success, this could negatively impact your deal. Selling a business is an all-encompassing process, and it can be next to impossible to handle all the associated tasks while still putting all the necessary time and energy into your business.
Additionally, you will want to absolutely make sure confidentiality is maintained. A breach of confidentiality, whether to employees or to competitors, can quickly sabotage your deal. There are countless instances where a deal fell through due to a breach in confidentiality.
4. Get an Outside Perspective
What is the best possible light for your business? Since you’re involved in the day to day running of the business, it is hard to have an outside perspective. Plus having never sold a business before, it can be hard to know what buyers will respond positively to. That is a great reason to work with a business broker or M&A advisor. They have years of experience knowing what attracts and deters buyers. They will help you to emphasize your strengths and minimize your weaknesses.
While emphasizing the positives, you will of course want to be sure to be transparent about issues affecting your business. Otherwise, the lack of knowledge can come back to haunt you. When it comes to negative factors, your business broker or M&A advisor will work to help buyers to understand how some of these can be turned into positives once they take over the business. Or they can assist you to fix some of those weaknesses before putting your business on the market.
5. Price Your Business Correctly
It should come as no surprise that if the price you set on your business is too high, you will lose interest from prospective buyers. That is another advantage to working with business brokers or M&A advisors. They will assist you to assign a fair market value to your buyers. When the price is optimal, the strengths of your business will stand out more. While it’s essential not to undervalue your business, you also want to make sure that you don’t overvalue it either. The good news is that brokerage professionals have experience and expertise at listing the optimal price.
The post 5 Ways that Sellers Can Focus on the Positives appeared first on Deal Studio – Automate, accelerate and elevate your deal making.
No one likes to think about the deals that didn’t succeed. However, the fact of the matter is that sometimes things go wrong during the process and a sale doesn’t successfully close. We have pinpointed the most common reasons why this happens into three main categories. By understanding the issues that can prevent a deal from finalizing, we are able to dramatically maximize the odds of success for clients.
1. Issues with the Seller
If a seller lacks a strong reason for wanting to sell his or her business, that seller is often unable to be flexible on the terms of a deal. As a result, when complexities arise during the sales process, the seller doesn’t have the patience, commitment and/or stamina to work to overcome those issues. In many cases, a seller has presented an unrealistic price for the business and simply cannot be realistic about the true value the business will sell for on the market. Another common issue that arises with sellers is that they are not fully transparent with the potential buyer. For example, they might be neglecting to mention serious problems with the business, such as new competition on the horizon.
2. Issues with the Buyer
Just like circumstances surrounding the seller may interfere with the sale of a business, the same is true for buyers. In some cases, the buyer is just mildly interested in being a business owner. As a result, he or she doesn’t have the wherewithal to continue on and navigate the complexities that can arise during the stages leading up to a successful deal. There are other issues that often pop up with buyers as well. For example, they also may have unrealistic expectations regarding price. Some buyers are not willing to pay the fair market value for a given business. In other cases, once they find out the amount of work that will be required to make the business successful, they are unmotivated to continue.
3. Third Party Interference
In some instances, there is no issue regarding the buyer or seller. Instead, it is a third party that interferes. An example of this would be a landlord being unwilling to transfer a lease or grant a new one. Or unexpected issues with the federal or local government could cause problems. Another problem that involves a third party occurs when outside advisors, such as attorneys, overlook the fact that the goal is to put together a deal that will work. Instead, they get so caught up in protecting the best interests of their clients that they erect too many roadblocks for a deal to succeed. These types of problems are often completely unexpected by either the buyer or seller.
It is hard to argue with the fact that if a buyer isn’t really committed to selling, perhaps it is not the best choice for them in the long run. The good news is that if potential problems are handled at the appropriate stage of the deal, most business deals do come to a successful conclusion. Business brokers and M&A advisors are specialists when it comes to resolving and circumventing potential issues.
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