The Ten Year Transfer Cycle in the U.S.

Etienne — Mon, 12 Jul 2010 14:20:53 +0000

BiggsKofford had the privilege of sponsoring a presentation by private capital market prophet Rob Slee on June 23 at the Cheyenne Mountain Resort in Colorado Springs. Among other topics, Slee presented his U.S. Ten Year Transfer Cycle concept and extended it to predict the next ten years. Let’s take a look.

According to Slee’s research, the United States economy experiences a recession (or other economic downturn) during the first three or so years of every decade. The capital supply to the private markets becomes restricted, primarily because lending is restricted, which reduces the leverage a buyer can achieve and lowers valuations as well as limiting access to working and investment capital.

This begins to transition around the fourth year as companies improve profitability which leads into a period of free-flowing capital into the private market. Humans are creatures of habit, so we quickly forget the recession we recently survived and continue to spend and invest until we are over leveraged and over invested. At this point, parts of the economy begin to feel the strain and the economy as a whole is affected by the end of the ten year period.

Why will such a cycle be expected to continue? Because the nature of people, namely, the private business owners, bankers, investors, and politicians in America, is to be overly optimistic in the good times and overly pessimistic in the bad times. We also take a predictable amount of time to adjust to changing conditions and we can be counted on to react in certain ways.

Today, the catalyst for our recession was sub-prime mortgages followed by complete financial system meltdown, bankruptcies, and major fiscal policy changes. Impending commercial mortgage uncertainty will help us to remain in a deal recession for the next several years. Business values will remain flat or fall further as we struggle to adjust. But adjust we will (or go bankrupt) and the survivors will profit again.

In my last post on business value, I mentioned that you can expect to achieve the highest return when selling your business at the right market timing. If the transfer cycle holds, the best time to buy a business will be any time from now through 2013 or so. The best time to sell a business will be toward the end of the prime selling time, or roughly 2016 – 2018. Obviously, businesses will continue to be bought and sold every day, but a savvy business owner will look to exploit this cycle to his or her advantage.

SBA Lending when buying a small business

Etienne — Sun, 24 Jan 2010 03:35:50 +0000

Everyone knows the housing market has tanked and that “banks aren’t lending”. What is less commonly known is that the lack of debt financing has been a key factor in making it more difficult to buy or sell a small business. Recently, I had the privilege of sitting down with Melissa Knutson, a business banker from Chase in Colorado Springs and asking her about the state of small business lending in Colorado Springs.

NextExit:	Let me ask you the obvious question: is Chase still lending?
Knutson:	Yes! Throughout the “credit crunch”, Chase never stopped lending to small business owners. In fact, we recently announced that Chase plans to increase its lending to small businesses by up to $4 billion in 2010, boosting expected new lending to about $10 billion to this vital segment of the U.S. economy. Obviously, our new loan volume will reflect demand from qualified businesses. Total outstanding loans and lines to this segment are currently about $29 billion.
NextExit:	If you’re still lending, how has business acquisition loan criteria changed in the last year?
Knutson:	There have been significant changes as recently as October 1, 2009. For example, Chase can only utilize preferred lender program (PLP) authority if: a) The amount allocated in the business valuation to intangible assets is less than or equal to $500,000 OR b) The amount of intangible assets exceeds $500,000 but the borrower or borrower and seller inject at least 25% equity into the project (seller financing is considered equity if it is on complete stand-by, with no principal or interest payments allowed for at least two years). President Obama has announced new proposals that would be added to the Stimulus Plan approved earlier in 2009. One of the most interesting is a proposed increase of the cap on 7a loans to $5 million (from $2 million). All of these new proposals require Congressional approval and then implementation time by SBA. We are hopeful that the changes will occur soon. (Note: Here is a press release from the SBA on Obama’s proposals)
NextExit:	What are the key features you will look for when making an acquisition loan? In other words, if I am a potential purchaser of a small business, how should I structure the transaction to get financing from you?
Knutson:	The first requirements we look at are the 3 C’s: Credit, Collateral, and Cashflow just like we do for any other loan. Credit: We look at both the borrower and the business to determine if there has been positive credit and management history. Collateral: Is there sufficient collateral as a secondary source of re-payment? Collateral requirements are highly effected by the industry of the business. Cash Flow: Does the business (and the borrower) have sufficient cash flow to support the business as well as the additional debt payments? Specifically for the SBA program, there are additional restrictions on the structure of the transaction: The Small Business Applicant must purchase 100% of the ownership interest in a business. For example: Individual A, who currently has no ownership in the business, wants to buy out Individual B (50% owner) and Individual C (50% owner). The individual CANNOT buy into an existing business. For example: Individual A, who currently has no ownership in the business, wants to buy out Individual B (50% owner). Individual C will retain 50% ownership. An existing owner CAN purchase the stock of another owner resulting in 100% ownership by the purchasing owner. For example: Individual A, who currently owns 50% of the business, wants to buy out Individual B (25% owner) and Individual C (25% owner). The existing owner CANNOT buy less than 100% of the other ownership interest. For example: Individual A, who currently owns 50% of the business, wants to buy out Individual B (25% owner). Individual C will retain 25% ownership. The seller can remain as an officer, director, stockholder, or employee of the company for up to 12 months. Loan cannot be made solely to the individual purchasing the business. The business must either be the borrower or a co-borrower on the transaction. The business must also be included as a buyer on the executed purchase contract. The borrower is required to have a conversation with the seller regarding the seller’s willingness to finance any intangible assets being purchased (i.e. goodwill). On a personal note, I want to know that the buyer has done their homework on that business. It is critical that buyers take the emotion out of their decision as much as possible and truly understand the business, its financials, obstacles and what effect they will have on that business.

Melissa Knutson is Relationship Manager with Chase Business Banking RM Channel in Colorado Springs, CO. Melissa can be reached at (719) 227-6497 or by email at melissa.j.knutson@chase.com.

Next Exit CPA » Buy a Business

The Ten Year Transfer Cycle in the U.S.

SBA Lending when buying a small business