Buying A Business Tips and Updates

I received a number of great comments to last week’s column and also read a terrific update on the SBA program. I want to share these with you in today’s post. 

I appreciate the feedback on last week’s article about buying a service business. The comments from John Chang and Hugh Elliot were especially astute. John’s suggestion to buyers was right one target when he stated; “If you don't enjoy serving customers / clients and interacting with them, no matter how much money you're initially making or how good the business model is or how skilled your team is, it's a matter of time before things collapse!”

Hugh brought up an equally important point to my comment that a buyer of a service business has to understand what it is specifically that you are buying. Hugh’s comments furthered this when he referred to some prior acquisitions a buyer of his was considering, but rejected because: “with the owner planning on retiring, there was a gross mismatch between price asked and value to be acquired.”

You can see from these two points in addition to the others noted in last week’s blog that the intangibles of a service business often reign supreme. The bottom line to be learned here goes beyond just service businesses.

Small businesses are rarely asset-heavy. You are buying an income stream. The bulk of the value is often associated with “goodwill”, which, on its on is meaningless, because it is simply the difference between the value of the hard assets and the purchase price. Yeah, yeah, I know a few of you hard core and alleged valuation experts will post all these wonderful comments trying to validate goodwill, but say what you want, it is subjective fluff, and nothing more.

The so-called assets of the business may not be anything a buyer can touch, feel, or even attach a reasonable value to. But guess what? You had better get comfortable with that fact because that is the foundation of most small businesses.

A Great Article I Received

On the subject of Goodwill, I read a great article by Ronald A. Feldman, the CEO of Siegel Financial Group www.siegelcapital.com this week as an update to the SBA program. Ron did a masterful job summarizing the present-day fate of the program, although the details may have changed again in the past 72 hours. In any event, here’s what Ron had to say:

“President Obama announced that the Federal Government will purchase up to $15 Billion of SBA debt to free up the secondary markets.  Unfortunately, the devil is in the details.

The funds allocated for this purchase are TARP funds, which come with major strings attached.  The broker-dealers that manage the sale of SBA loans are not happy with giving up equity in their businesses and living with the other regulations of the TARP.  They have nothing to do with the banking crisis we are in, and do not feel, (and I personally agree) that they should give their hard earned equity to Uncle Sam. 

Chris Reilly, President of CIT small business lending (the largest SBA lender for years) stated from her Blackberry yesterday:

“The "glitch" right now is that because the Government’s direct buyback program is being financed with TARP funds, the broker dealers that act as the intermediaries (who pool and certificate the loans) apparently will need to comply with the executive compensation and stock warrant provisions of TARP--despite the fact that these are NOT troubled assets and the brokers are not receiving infusions of capital. As you may imagine, the broker dealers are not embracing this especially given the recent debacle surrounding the AIG bonuses and the House of Representatives' kneejerk reaction to tax the bonuses.

So...the Treasury seems to be aware of these "obstacles". The program could be a significant impetus to SBA lending--but if the brokers won't play it doesn't work. I am hopeful that all the parties involved will work together to find a quick resolution to these issues so lenders can get access to the liquidity they need to get back to the business of making loans.”

In today’s Washington Post, an article stated:
“The top six middlemen now say they would rather hold onto the small-business loans and make money off the interest payments than sell to the government and submit to its restrictions, according to documents and interviews with the firms and their associations. This group, which includes SunTrust Bank, Coastal Securities and Signature Bank, has 80 percent of the market share in this business. Associations say most of the smaller players are also unlikely to participate.”

“Joseph J. DePaolo, chief executive of Signature Bank, said the decision by Congress to crack down on Wall Street bonus payments in recent weeks has made him wary of participating in any government program, let alone the small-business initiative. The limits on compensation are a significant factor for his firm because it rewards its bankers according to how much business they bring in. That pay scheme is critical to attracting and retaining its employees, he said.”

"Why would you participate?" DePaolo said. "How can you do business if the government at any time can change the rules of the game to protect its investment? That unknown today . . . puts us in a position that we don't feel is prudent." The article continues…

“Treasury officials now "are searching for ways to get around a strict interpretation of the TARP law," said Tony Wilkinson, chief executive of the National Association of Government Guaranteed Lenders, which has been in contact with the administration. But all of the alternatives under consideration could upset lawmakers or fail to attract participants.”

“An administration official added that the Treasury has been acting quickly on all of its rescue programs, not just the small-business initiative.

"When the final terms of the small-business program are announced, we're confident that the program will be successful in providing credit to small businesses so they can grow, thrive and help this economy recover," said Andrew Williams, a Treasury spokesman.”

Ron summurized it well when he stated: "Hopefully, this is simply another trip over their shoe laces, and the regulators will figure a way for this to work out for all parties involved.  Until that happens, we still do not have a secondary market for SBA loans, and lending will not improve to small businesses.”

My Thoughts

This stalemate in the lending program in my mind summarizes typical Washington BS. Here’s something crazy: a storyu on one website I saw noted that an investigative reporter called twenty-one of the largest recipient banks of the government’s first $350 billion bailout and asked them two questions:

1. What did you do with the money 
2. How much do you have left?

Of the twenty-one banks called, none provided an answer and all responded they were not obligated to do so under the agreement. Is it possible that we elected such complete morons to scribe a bill that did not have any provision for disclosure? Talk about giving the inmates the keys to the prison. Wow!

When these same idiots on Capitol Hill were grilling the auto executives the first time, I started thinking that there should be a movement to impeach these imbeciles (the politicians that is - don;t even get me started on the auto executives). How dare they sit up all high and mighty when they themselves can't even figure out how to craft a bill that just blew $350 billion?

I am really interested to hear your thoughts. I just don’t get it: what the hell is happening with all this bailout money? Is it definitely not filtering down to the people and businesses that need it, so where is it? I feel like I’m taking crazy pills every time I read about these programs.

Our outrage is so poorly targeted. Who cares if the auto executives took private jets to their meeting? Bad PR I agree. But that is not the issue. The same can be said for why all this time is being spent on regulating salaries and bonuses of bailout firms? Of course there has to be some policing, but the government has allocated almost a trillion dollars to the financial industry and it hasn’t yet, not will it ever in my opinion, have any positive impact whatsoever. Something is very, very wrong here folks! Please, help me out on this.

Finally, please write your member of Congress and get their asses in gear on these SBA guidelines because as they have it now, it is a completely useless program.

Comments

[George More]

You can buy a business but you can never buy the experience and the personal contacts of the previous owner.

Make sure you have an integrated understanding of the prospective niche before you move ahead with the purchase.

[Reverse Mortgage Services]

Hi there!i read your article I almost forgot to ask that are these bankers also using the money we entrusted to them as depositors to line their own pockets?
well in last your post was great and well informative!chears

[Chris Mularoni]

I almost forgot to mention that these bankers also used the money we entrusted to them as depositors to line their own pockets (bonuses and other compensation) and to buy and pay for politicians.

[Chris Mularoni]

When trying to understand what happened and why, there is an old political saying, look to who benefits. Bush, Obama, and many if not most members of congress are deep in the pockets of these bankers. They bought and paid for these politicians with stock holder money and tax payer money (courtesy of the central bank). They went to the same ivy league schools and often run in the same social circles. They bailed out their buddies and financial supporters with our tax money, no questions asked.

[Carla Poma]

Finally, someone who can express my thoughts exactly about the Congress. Are they serving the people or is it themselves? They are raking the auto industry over the coals and handed these banks tons of money no questions asked, no responsibilty to the taxpayers, zip, nada, nothing . These banks made horrible lending decisions to loan to anyone and everyone. If we made decisions like these with our businesses there is no one to bail us out, let alone get a salary increase. The Congress just voted themselves a 13% salary increase because they work hard for it. Try running a business in Michigan in this atmosphere.
I hope people stand up and take notice and tell our congressmen/women to help small business and help the taxpayers and not saddle them with debt. We will be paying the price in the future guaranteed.

[Sandra]

Hello-I would like to know the same thing, my husband and I are in the process of purchasing a small business, our second, and were turned down by 7 banks, and 2 SBA attempts, we have EXCELLENT over 800 FICA scores, plenty of collateral for a very small loan in the business world (<150,000) and you wouldn't believe the hoops we had to jump through...where is the money for the honest, small business owners...? We certainly aren't flying around in jets.....I wonder...

[Tips Independent Computer Consultant]

Somehow i am not surprised that our goverment keeps screwing things up.
TRILLIONS were wasted.

[Independent Computer Consultant]

Didn't expect anything useful or positive to come from politicians.

The whole bailout is one huge disaster and waste of our money.

[Dennis R. Martin]

Next time write what you really mean. An old military term comes to mind, "FUBAR". Believe it applies to the government melt down. Elect a person that is a junior Senator spending most of his time running for President and never signed the front of a check and this is what you get. A TelePrompter reader in an empty suit. Hiring other empty suits to do the nations business while they work with corrupt Senators and Representatives who caused the problem in the first place. Amazing how the Speaker picked on the auto executives for flying their private jets when she and her Friends and family are routinely whisked about on government jets paid for by taxpayers. Congress is adjourn off to see the Pope and visit Italy.

The SBA programs won't fly. Do they care. I have doubts that the brave new socialists care. They specialize in spreading misery. Not joy or success. Why would they give a tinker's damn if the sale of small businesses come to a screeching halt? Tell me again what happen to home sales, courtesy of Mr. Frank and Senator Todd and company.

FUBAR.

[John Jacobson]

Your article makes it sound like we have a problem with the securitization of the notes. When in fact the 800 pound gorrilla in the room is the fact that that the SBA set a limit of $250,000 on the value of goodwill which as your article points out is normally a huge percentage of every small business transaction. Until they fix the percentage of goodwill that can be financed then your article makes for good political copy but does not address the needs of the business broker.