Archive for year: 2012

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The size of your business, the purpose of the loan and how you operate your firm play a big part in the type of loan that’s available and right for you.

By: James Cassel

MIAMI, Florida, May 21, 2012 – Thinking about taking your business to the next level, or simply sustaining it through challenging times? You’ll need effective management, stamina and, most importantly, money. However, accessing funds for growth capital, cash-flow shortages, an acquisition, or because your lender cut you off can be a complex and daunting challenge. Let’s ignore equity for now. Loans have different risks and costs, and the size of your business, the purpose of the loan and how you operate your company play a big part in the type of loan that’s available and right for you.

Many owners “bootstrap” their businesses — looking to personal savings, credit cards and their regular income as a source of capital. But, when those options are exhausted, where can an entrepreneur turn for cash? Getting to know your options is a good first step. If you’re seeking to borrow in excess of $5 million, you can turn to an investment banker who can identify sources of capital and evaluate terms of a deal. Regardless, every business is different, and all business loans are not created equal. Remember, with money comes strings.

Friends and family: If you’ve thought about friends and family as a source of financing, you’re not alone. However, don’t assume these loans are “free.” Even when working with friends and family, the deal should be an arm’s-length transaction (although this is not always the case). Therefore, the interest rate, loan-to-value, and terms must reflect — or nearly reflect — market rates, no matter what the relationship between lender and borrower.

Pros: Since these loans are based on relationships, not necessarily credit worthiness, they can be good for business owners with less-than-perfect credit or collateral. In addition, if you are running short on time, you can often get a loan more quickly than from banks or other financial institutions. You might also be able to get lower interest rates and less-restrictive terms, even in the context of an arm’s-length transaction.

Cons: Every loan carries risk, and if your ability to pay back the loan changes, then your relationship with the friend or family member could be jeopardized. Plus, when you borrow from friends and family, there are often strings attached, including unsolicited business advice, feelings of entitlement and expectations of continued involvement after the loan is paid off.

Cash-flow loans: As the name implies, cash-flow loans are generally unsecured loans, whereby the lender looks to anticipated cash flow to repay the loan and requires certain financial and nonfinancial covenants be met. With this type of loan, you take advantage of the reliability and regularity of your company’s revenue stream. Traditional commercial banks and certain finance companies frequently make these loans. For smaller businesses, the lenders will generally require personal guarantees.

Pros: Cash-flow loans can be useful to fund an acquisition because you can use the cash flow of the company you are acquiring (in addition to your own) to repay the loan. If you have a stable credit history, as well as predictable and growing cash flow, cash-flow loans provide a fairly flexible source of funding.

Cons: Small and mid-sized companies with fewer customers, smaller contracts and less-reliable income may have more difficulty obtaining these types of loans. Similarly, companies with shorter operating histories may not be able to demonstrate the necessary consistency of cash flow to secure a loan.

Asset-based loans: Both small and large businesses can consider asset-based loans, which are based on the value of hard assets, receivables and inventory for determining borrowing limits. The amount of money available to borrow is generally based on a formula.

Pros: Asset-based lending is flexible, since you can use accounts receivable and inventory as collateral. If your company has less-than-perfect credit, asset-based lending could be for you — especially if you find a lender who specializes in your industry. You may also be able to access capital more rapidly than through a loan based on operating income and other financial measures.

Cons: One of the drawbacks to an asset-based loan is the formula. One example: If you are only allowed to borrow on accounts receivable less than 90 days old. If you are not paid by then, you will need to pay back that portion of the loan anyway. In addition, if the assets reduce in value, you may owe more than those assets are worth. Plus, lenders discount assets when determining how much they will loan your business. For example, a lender may not loan anything against foreign receivables, 50 percent of the value for work in progress and perhaps 80 percent of the value of U.S. receivables.

Factoring: Factoring, or selling your accounts receivable for cash, provides your business with working capital. However, the value of your receivables will be greatly affected by your customers’ payment history. If you have had a hard time collecting from customers, the factoring company will likely have a difficult time as well. Accordingly, the amount of money you can expect — and the cost of that money — will be reflected by this. Factoring can be with or without recourse. There may also be certain holdbacks on the purchase price.

Pros: Instead of waiting for clients to remit payment, you’ll have faster access to money owed to your business. Also, since factoring focuses on your customers’ credit worthiness and not yours, you can access capital without the lender scrutinizing your business’ credit worthiness.

Cons: Factoring can be expensive. Factoring companies charge fees and buy the receivables at a discount (the equivalent of interest). They charge a premium for the risk of nonpayment by your customers.

Other Options for Small Businesses: Even in today’s post-credit-crunch environment, business owners might perceive that lending options are scarce. In addition to what I have mentioned, other available types of loans include purchase-order financing, international accounts receivable financing, and mezzanine financing, as well as hard-money lenders.

The fact is, commercial lending is more plentiful than it has been in several years. Banks and other financiers have lots of cash to lend. So, always consider your primary banking relationship as a viable source of capital.

In addition, companies have access to resources, including the U.S. Small Business Administration (SBA). The SBA guarantees loans issued by commercial banks and has a variety of programs based on your company’s size, industry and stage of development. This can enhance your credit worthiness. And, don’t let the word “small” fool you. The SBA defines small businesses differently from what you may think.

Today’s entrepreneurs can also use the Internet to find loans. There are a growing number of sites trying to assist with both debt and equity. Try Boefly.com for loans or examine “crowd-funding” sources. Microloan financing destinations like Kiva.org may be able to provide businesses with the financial boost they need.

Aside from evaluating loans, you should also compare lenders. Look beyond interest rates at terms, fees and costs. Also, consider how much experience your lender has in your industry and its willingness to stick with you over time. When you think you have found the right lender, examine how it addressed past crises and current media attention. And, no matter what you decide, never finance a long-term asset with a short-term loan.

With an honest evaluation of your borrowing potential, you will be set for the next stage in your business, whatever that may be.

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Decisions about the future of a company can be a source of great stress and family conflict.

By: James Cassel

MIAMI, Florida, April 15, 2012 – Between 80 and 90 percent of all U.S. companies are family businesses, according to the Family Business Review. Over the course of the next decade, more than 40 percent of those companies’ top executives will retire, making family business succession a major issue for thousands of enterprises and thousands of families.

With this massive change on the horizon, it’s safe to assume many of these companies will address succession by selling the family business or transitioning to the next generation. In addition, many family businesses contemplate a sale for myriad other reasons besides succession. Regardless of the motivation, selling may not be the right choice. And for those business owners who choose to sell, the process can be a source of great stress and family conflict.

Here are five questions to help your family-owned company navigate the prospect and process of selling.

1. Why are you considering a sale? 

It’s important to identify the reasons why you want to sell the business, because the motivation for a sale can have a large impact on the best course of action to take. For instance, if there’s not another family member or generation in line to take over the business, then a sale may be the best way to monetize your asset. By contrast, market opportunities may be the driving force, making the urgency for a sale more present. Other criteria could include divorce, death, family members’ seeking alternative career directions, or tax and estate planning considerations.

2. Is an outright sale the best choice?  

Before hanging the “for sale” sign, consider strategic alternatives. In this regard, consult with your accountant, your attorney, or an investment banker. Depending on your goals, there may be a number of other options available to meet your family’s objectives.

For instance, recapitalizing the company could provide cash to the exiting generation (or exiting family members) while allowing the remaining family members to continue in management roles. If liquidity is not an issue, then identifying non-family members for executive management positions can address succession issues while allowing the family to retain ownership (and therefore the cash flow). And of course, if a sale does make sense, then be certain to engage the appropriate professional advisors to ensure you realize the greatest possible value from your family business as early as possible.

3. Are your decisions driven by emotions or good business sense? 

Despite the prevalence of family members that work together, few can avoid the potential divisiveness that money and business dealings can have on their relationships. Whether it’s a case of siblings facing off with each other, cousins in conflict, or parents and children disagreeing, the emotions of a family quarrel can lead to bad decision-making that can have catastrophic economic impact on a family business. I have seen this more than once: As a result of ego clashes or a lack of common sense, much money is left on the table. And once again, one of the best defenses a family can take is to engage the right assistance. A corporate psychologist, family therapist, or professional mediator can often prevent emotions from hijacking a family business’ potential and ensure that equity and “cool heads” prevail.

Emotions can also affect owners’ sense of what a business is worth. While your business is your baby, prospective buyers are often uninterested in the characteristics you consider most significant. Many buyers are extremely disciplined in their approach to value. Look to your advisors to provide an accurate valuation and to negotiate without bias.

4. Are family members on the same page?  

Families sometimes struggle during a sale because some members are risk takers and others are more conservative. One owner (or group of owners) may want to hold out for a premium price while another owner may want to take the first offer. As a seller, the investment bankers representing your company should engage all of the selling parties before going to market to ensure that everyone is on the same page, speaking with one voice and mindful of the same goals. Sometimes it might even be better if one family member buys out the other if that person will be an obstacle in the sale process.

5. Are you ready for what comes next?  

The excitement of a deal and the lure of what looks like a windfall can distract business owners from the reality that, after a transaction, they will no longer own and control their family business. What will you do with your proceeds? What will you do with your time? Many successful small business owners aren’t ready to wind down after selling their companies, and they sorely miss the stimulation of running a company. They still want to be in the game. For other family business owners, a sale can mean their children, siblings, or spouses are left without a job. Still, for others a sale can mean their legacy becomes uncertain.

It’s helpful to contemplate and visualize how you and your entire family will move forward after the sale of your family business.

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By: James Cassel jcassel@casselsalpeter.com

MIAMI, Florida, February 19, 2012 – As an investment banker who represents clients during the sale, merger and acquisition process, I frequently hear comments from those who regret not planning more carefully — or not planning early enough — for the sale of their businesses.

A common mistake is to wait until the day you decide to sell your business to begin preparing, and by then, you may have lost a great planning opportunity. So, if you plan on selling today or any time in the foreseeable future, here are a few tips.

1. Hire a professional team. Assemble a team of advisors to navigate the sale process from personal tax planning to valuation and marketing, through negotiations and closing. Your team should include an investment banker or business broker (depending on the value of the business), a financial planner, a lawyer (perhaps a team of lawyers), and an accountant.

Tip: Remember, the advice you get before you go to market with your business can be just as valuable as the advice you get during negotiations. So engage your advisors early.

2. In connection with family, talk to yours early on in the process.Failing to involve your family at the front end can spoil a deal on the back end, especially when a second or third generation is involved, and they expect to take over or profit from the family business. I frequently advise potential sellers who haven’t discussed the situation with their family members to come back after they have the conversation. And, not surprisingly, family members have strong feelings that may affect the owners’ decision to sell.

Tip: When selling a family business, determine who will have a say in the deal and who will not. Even minority owners should be consulted to avoid acrimony.

3. Consider if you want to work after a sale and for how long. Do you want to exit immediately, or do you want to keep working for a few years? For many, age and lifestyle dictate this decision. For instance, a 75-year-old business owner may be ready to retire, but a younger owner might need a regular income to augment revenue from the sale. Many times it is more than age: The business owner’s personality helps shape the company, so selling is difficult. Sometimes the personality of the business and the owner’s personality are alike. Your desires will affect how you position yourself.

Tip: In the event of a successful sale, be prepared to continue working in some capacity during the transitional period.

4. Consider the best ownership structure. Each of the business ownership structures, such as C-corps, S-corps, limited partnerships, and limited liability companies, offer various advantages and raise different considerations during the sale process. Be cognizant of the potential for lower overall tax rates and the state-level tax implications.

Tip: Ownership structures have long-term implications that can dramatically affect the net amount of money you realize from selling your business. Planning well in advance of the sale may permit you to modify the structure to be the most tax-advantaged.

5. Organize corporate documents, including financial records. Organized record keeping makes good business sense in any circumstance. Getting the books and records in order now will keep you from scrambling for documents when potential buyers conduct their due diligence. Having an up-to-date corporate book is important; making sure your financial records and tax returns are available is a must.

Tip: Ensure easy access to financials, vendor contracts, and customer contracts. What you owe and what is owed to you will have a direct bearing on the value of your business.

6. Decide how you will keep the process confidential. You don’t want to scare away important customers who may be afraid that a change in ownership will threaten their level of service. You do not want to give your competitors something to use against you. There is always concern with how and when your employees will be informed of a possible sale. Likewise, you may want to present the company to the largest number of prospective buyers.

Tip: Your employees are an asset, so the loss of key personnel can hurt a sale. In this regard, carefully consider whether to disclose the possibility of a sale to your most important team members (and the timing of when you will do that).

7. Determine whether you want a partial or total exit. Financial buyers such as private equity firms are both control and minority buyers. Your intended exit strategy will impact transfer of ownership differently. For a total exit, you will maximize the consideration you receive. For a partial exit, there are many social issues to consider that might be equal to or more important than what you receive.

Tip: Your financial advisor can help you determine your necessity for ongoing income in the context of your overall wealth, including sale proceeds.

8. Be realistic with your expectations of value and understand how a buyer will calculate it. In our current economic climate, a multiple of earnings or EBITDA (earnings before interest, taxes, depreciation and amortization) are typically the most accurate measures of a company’s value. The higher your earnings, the more you can expect a buyer to pay for your business. What multiple a buyer will pay will vary greatly depending on numerous items, such as size, industry, capital and working capital needs, and future projections.

Tip: In addition to earnings, look at the diversity of your customer base. If your revenue is concentrated with one or two clients, this will hurt your valuation. While the seller wants to be compensated for the future, the buyer wants to pay for past results.

9. Identify your company’s most attractive feature. Figure out what characteristic or asset will help you best sell your business. Perhaps you have a steady stream of recurring revenue, a sought-after client, real estate assets, or valuable intellectual property or processes.

Tip: Work with an investment banker to put together a sales memorandum and management presentation. This is the sales document that will tell your story and put your best foot forward.

10. Be prepared for newfound liquidity. Most sales of businesses include purchase considerations such as cash, stock, or both. They can also include additional consideration in the form of earn-outs and non-compete agreements. Make sure you have an investment plan to address the investment of your new wealth. Likewise, contemplate the tax liabilities before transacting a sale.

Tip: Seek the advice of an estate planning attorney to ensure that your assets remain protected from generation to generation. Remember that you generally will not replace your current income with the proceeds of a sale.

James Cassel is co-founder and chairman of Cassel Salpeter & Co., LLC, an investment banking firm headquartered in Miami that works with middle market companies.