The Economic Advisor

The Good News About Utah Businesses and the SBA

When was the last time you heard some “Good News” about the financial situation this country is in? Well, recently during National Small Business Week, we did have some good news about being in business in Utah.

I’m sure you are aware by now that the SBA requirements surrounding financing of Small Businesses has come under huge changes. These changes affect business refinancing and equipment purchases with only a small portion of the SBA loans going to existing business purchases. The sweeping changes in the SBA are touching the entrepreneur on several fronts.

As of May 2009, in Utah, the state leads the country in small business loan approvals. In fact, small businesses are big business in Utah. The Utah District SBA Office indicated that there were more guaranteed loans here than in any other district office in the entire country

Stan Nakono indicated that one of the reasons Utah is the leading district in SBA loans is because “we’ve fared better, we’ve been a little bit more insulated than other parts of the country; and thankfully, our small businesses have been able to get the credit that they desperately need.”

With that said, the Business Owner today needs to be even more aware of an Exit Strategy, and the requirements for financing the purchase. Knowledge Is Power!!! Thus, it’s critical to keep the following information in mind as we go through the day to day operations of our businesses with an eye to the future.

Following are some areas of particular attention to keep in mind:

Limiting Financing for Specific Businesses Niches- With the concept of goodwill in mind, the new SBA financing restrictions effectively limits or negates the possibility of financing a sale for a variety of common business, including professional practices, home healthcare providers, and internet based firms. This type of Business Niche often has minimal hard or fixed assets to be considered for a business loan. This is in the context of a line of credit as well as financing the sale of a business.

Skewed Business Values based on Fixed Asset Values- In order to maximize the SBA guaranteed loan offered with the new restrictions in place, businesses are looking to maximize the value of their fixed assets, as this value can increase the loan amount offered to the Buyer in a purchase transaction. Additionally, higher fixed assets provide an asset base for a Line of Credit for the Business Owner. Thus, Owners may tend to increase the level of fixed assets that are not producing as effectively for cash flow purposes. This could also potentially lead to less income to the business owner due to an excess of fixed asset costs. This is a difficult decision for the business owner reliant on guaranteed lines of credit for operations. Asset purchases may not be a necessity except for the maintenance of a fixed asset base for the bank.

The interesting part of this is that fixed assets often have little bearing on the actual value of the business being sold. Available cash flow to the Buyer, not fixed assets, creates the value of a business. This type of financing more closely resembles business asset liquidation, not the sale of a well run, cash flowing, going concern.

Strategically Preparing an Exit Strategy

Business owners considering selling their operations during this current economic climate will need to be forward thinking in order to achieve the levels of financial success (business value) desired. Under the new SBA restrictions, Sellers will be required to carry back at least 10% of the overall loan, or 50% of the Goodwill, whichever is greater. The limit on Goodwill financing is $250,000. Additionally, the Seller will not be able to receive payments until the SBA portion of the loan is repaid by the Buyer. Currently it could mean 7 – 10 years with out Real Estate, or 20+ years with Real Estate. This means that the Seller will need to plan their exit strategy carefully, and well in advance.

It is important to realize that the Seller is now the Bank. Here are some strategies that the Seller can look at when considering selling the business:

- How experienced is the Buyer and has the Buyer ever owner their own business?

- How strong is the Buyer’s business plan?

- Is the plan calling for enough capitalization and working capital?

- Does the Buyer have a strong plan for the transition and to mitigate potential customer loss?

- Does the Seller have the ability,or desire, to buy back the business from the bank (at a discount or ‘short sale’) if the business fails. This is one of the strategies to protect the Seller’s second lien position and is essential to consider.

- If the Seller decides to carry all of most of the financing, what is the age and health of the Seller if he has to take the business back? In today’s economic climate, it is imperative that the Seller not wait too long to implement an Exit Strategy.

- Does the down payment and proceeds from the financing cover the Seller’s investment if the business fails?

With the new SBA goodwill restrictions in force, business owners looking to sell their businesses need to take proactive steps to prepare solid exit strategies that yield them the value they desire at the time of sale. Also, their strategy must offer financial protection for the portion of the financing that they are required to hold back or it could be lost.

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