How will a buyer finance a business transaction in New Jersey?

480px-New_Jersey_state_seal

A frequent question we often get from our business sellers in New Jersey is, “how will a buyer finance a transaction in New Jersey ?”

Achim Neumann, President of A. Neumann & Associates, a firm with premier business brokers in New Jersey and offices in many of the northeastern states said, “In times when financial resources are more often limited, a financial structure becomes paramount in facilitating a deal”.  “A few years back, deals would usually consist of 75% cash to the seller and a 25% seller note. More and more frequently, we have begun to see changes to this ratio.”

When looking more closely at a financial acquisition in New Jersey structure a bit further, a lender would normally contribute around 50% to a transaction amount – in the previously mentioned 75% cash. Furthermore, where the industry type might be just one of the determining factors in defining the contributing amount, it has progressively become THE determining factor.

“Businesses for sale in New Jersey that are cash flow-strong and have fewer assets, such as service and distribution businesses in New Jersey, need to be matched with business buyers in New Jersey that have a strong net worth position” says Achim Neumann.  “These businesses for sale in New Jersey tend to have less of an asset base that can be used as financing collateral for a lender.”

Most asset-heavy businesses for sale in New Jersey such as manufacturers—and to a certain degree retailers—have plenty of assets at their disposal to allow a lender to find more collateral within the business, rather than looking at the buyer’s net worth.

In an environment punctuated by more stringent lending criteria, cash flow-based lending is increasingly in retreat and asset collateral, whether from the business/company itself or the investor, takes on a much stronger position.

Another deciding factor is the SBA lending process. However, it is not the cure-all or a majora game changer. “Often, we are approached by business buyers in New Jersey who believe that the SBA pre-qualification of our engagements makes any acquisition possible, independent of the buyer’s finances” says Achim Neumann, “but nothing could be further from the truth in this regard.”

While SBA pre-approval is very important measure for deciding the interest level of banks and the underlying financial requirements for a business sale in New Jersey, at the end of the day, it will not significantly divert from basic lending parameters.

“Our company has had the good fortune over the last three years, that we have had no deals rejected on the basis of financing” says Achim Neumann. “It has always been possible to put deals together with happy parties. Sometimes, it did require a little bit more seller financing, but ultimately, the deal was closed.”

How will a buyer finance a transaction in Delaware?

512px-Wilmington_Delaware_skyline

One question we often receive from our business sellers in Delaware is, “how will the buyer finance the transaction?”

Achim Neumann, President of A Neumann & Associates, a firm with premier business brokers in Delaware and offices in many northeastern states said, “In times when financial resources are more often limited, a financial structure becomes paramount in facilitating a deal”.  “A few years ago, deals would usually consist of 75% cash to the seller and a 25% seller note. More and more frequently, we have begun to see changes to this ratio.”

When looking more closely at a financial acquisition in Delaware structure further, a lender would quite often contribute about 50% to a transaction amount – in the previously mentioned 75% cash. Additionally, where the industry type might be just one of the determining factors in defining the contributing amount, it has progressively become THE determining factor.

“Businesses for sale in Delaware that are cash flow-strong and have less assets, such as service and distribution businesses in Delaware, need to be matched with business buyers in Delaware that have a strong net worth position” says Neumann.  “These businesses for sale in Delaware tend to have less of an asset base that can be used as financing collateral for a lender.”

Most asset heavy businesses for sale in Delaware such as manufacturers—and to a certain degree retailers—have sufficient assets in place to allow a lender to find more collateral within the business, rather than looking at the buyer’s net worth.

In an environment punctuated by more stringent lending criteria, cash flow-based lending is increasingly in retreat and asset collateral, whether from the business/company itself or the investor, takes on a much more profound position.

Another mitigating factor is the SBA lending process. However, it is not the cure-all or a game changer. “Often, we are approached by business buyers in Delaware who believe that the SBA pre-qualification of our engagements makes any acquisition possible, independent of the buyer’s finances” says Achim Neumann, “but nothing could be further from the truth in this regard.”

While SBA pre-approval is an important measure for determining the interest level of banks and the underlying financial requirements for a business sale in Delaware, at the end of the day, it will not significantly divert from basic lending parameters.

“Our company has had the good fortune over the last three years, that we have had no deals rejected on the basis of financing” says Achim Neumann. “It has always been possible to put deals together with happy parties. Sometimes, it did require a little bit more seller financing, but ultimately, the deal was closed.”

What to know about Business Seller price expectations in Washington D.C.

Washington D.C.

Frequently, the price expectation for the sale of a business in Washington D.C. is dramatically “off the mark” – and interestingly enough though, these off-estimates happen in both directions – under as well as over. In less than 10% of scenarios are the expectations consistent with what that of a Fair Market Business Valuation in Washington D.C., which in turn determines, or with what an investor is in fact willing to pay for a business. Why is this so?

“One of the key reasons for a consistent ‘overvaluation’ is the seller’s expectation for the business buyer in Washington D.C. to pay for later improvements in business performance – either due to changes in the general economic or specific market niche conditions or due to a future owner’s changes in the business structure”, says Mr. Achim Neumann, President of Neumann and Associates, a merger & acquisition and business brokerage firm in Washington D.C.

Bluntly speaking, business investors in Washington D.C. are not willing to pay for expected future improvements simply because the business investor argues that if he / she needs to implement the changes, then a credit should not go to the previous owner. On the opposite side, if the potential for an improved business structure is indeed available, then the (current) business owner in DC should make the changes first and then sell the business in Washington D.C.

“There are exceptions, though,” says Michael Gersten, Managing Director, Northern New Jersey & Southern NY State for Neumann Associates. “If there is a justified expectation of a market improvement, then both parties can come to terms on a deal structure that takes such improvements into account. We have successfully put many such deal structures into place, however, such business improvement must be due to external events, and not a result of the (new) owner’s readiness to make substantial changes to the business.”

The challenge for a large segment of business owners then is accepting a more realistic asking price. Indeed, after performing a Fair Market Valuation in Washington D.C. by an accredited 3rd party business valuation firm, an “outsider’s view” will often move expectations to a more realistic value, specifically, with respect to two factors: goodwill and deal structure.

Goodwill, often perceived as a nebulous concept, is actually a factor that can be fairly easy determined, by comparing the existing cash flow and the market based company value with its asset base. “We have provided over 500 business valuations in Washington D.C. and around the country over the past 10 years, and every one had a fair market determination of the goodwill, ’” says Gary Herviou, Managing Director Central NJ & Lehigh Valley for A. Neumann & Associates, LLC.

More difficult is the actual deal structure, which frequently contributes to unrealistic price expectations. As stated above, if there are expectations for a substantial improvement in the business climate, then the deal structure must take all of this into account.

Beyond this, however, there are other factors that will come into play. For example, the lack of a seller note will typically drive down the FMV of the transaction by 10% to 30%, even though, in many business transactions the seller note will ultimately never be used.

A second factor, such as the current low interest rates available from the SBA, will allow for a higher ROI for the investor and therefore for a higher transaction price. As recently reported, “Small-business lending activity is on the rise, but the size of loans is shrinking, new data shows. The total number of small-business loans jumped up 10.4% last year, according to a report released Wednesday by the U.S. Small Business Administration’s Office of Advocacy.” [The Wall Street Journal, July 15, 2013]

Such an increase in lending is often the outcome of low interest rates, which in return provides for a much more favorable deal structure, and subsequently, more deal flow.

“All in all, there are many factors that contribute to the determination of a Fair Market Value of a business in Washington D.C.,” says Neumann, “and it is truly unrealistic to expect a busy business owner to sort out all these factors. Choosing to use an accredited third party professional’s opinion and relying on M&A advisors in Washington D.C. who are active in the field on a daily basis, is certainly the more prudent way to go.”