Stuck In the Middle

Bloomburg Business Week had an article in their May 7th 2012 magazine written by Mike Dorning entitled “The Stuck-in-the-Middle Recovery” with some disturbing statistics. Let me restate the observations, “According to research by economists Nir Jaimovich of Duke University and Henry Siu of the University of British Columbia, ninety five percent of the net job losses during this recession were in middle-skill occupations such as office workers, bank tellers and machine operators.”

So during a recession the middle class typically is hit hardest, and then eventually climbs back. Only, that come-back isn’t happening. According to these economists, “Job growth since the end of the recession has been clustered in high-skill fields inaccessible to workers without advanced degrees or in low-paying industries.”  The article further goes on to state; “In March the U.S. had 2 million more managers and professionals working than five years earlier. Lower-paying service-sector jobs were up 1.5 million. It’s the middle-income jobs that have been slow to return.” “There are 3.2 million fewer Americans working in sales and office jobs and 1.2 million fewer employed in transportation and production – which includes factory and assembly-line workers, printers, welders, tailors, and poultry and meat plant workers. Another worrisome measurement: Median income in March 2012 was $2,900 lower after inflation than at the start of the recovery in June 2009.”

The article continues, “Not since the 1981-82 recessions have middle-income jobs snapped back quickly from the bottom of a downturn. In the 1990-91 and the 2000 recessions moderate-skilled jobs never made it back to their pre-recession levels.”

 
In a cynical moment, we have chuckled at the vision of what our economy would look like if we all had jobs flipping hamburgers (not that there is anything wrong with fast food or quick order cooks but there are only so many of those jobs as well). So perhaps we have finally arrived at the defining moment. As we have heard, the mantra in business today is “do more with less.” The potential is there for the next 10 years to be more disruptive than the last 10 years. Which means an eroding middle class, can any of us feel surprised?

It is my personal feeling that the “political establishment” both Republicans and Democrats should be tried for treason to this country for failing to serve to benefit “All” Americans and not just the special interest groups they seem to cater to so they can get re-elected.  No one can fault a desire of any business to gain in efficiency or lower costs. That is their stated goal, to maximize profits. Ross Perot warned us back in the late 90’s of the “sucking chest wound” our economy would suffer if we did not create domestic policies that encouraged our industrial base to remain in the United States. What is most disturbing to all of us, is how we have arrived at a point in the world economy that seeks out a corrupt country like Communist China to create a better economy for all. Our “middle class” is paying the price.
– Cheaper is not always cost effective-
Dan

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Facts about Upstate South Carolina

Current Population
Total Population (2011) 1,375,759
Total Households (2011) 537,556
Median Age (2011) 38.3
Age % of Population
Under Age 5 6.4%
Age 5 to 9 6.4%
Age 10 to 14 6.6%
Age 15 to 19 7.2%
Age 20 to 24 7.0%
Age 25 to 34 12.1%
Age 35 to 44 13.2%
Age 45 to 54 14.2%
Age 55 to 64 12.6%
Age 65 to 74 8.2%
Age 75 to 84 4.4%
Age 85+ 1.7%
Sources: ESRI Business

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Checklist for Sale of Business through SBA

1. Executive Summary
2. 3 Years Business Tax Returns
3. Interim Financials (P&L, Balance Sheet, w/in 60 days
4. Letter of Intent or Purchase Contract
5. Asset Allocation of Purchase Price
6. IRS 4506-T Form
7. Original Signatures w/Blue Ink

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Checklist for SBA Business Acquisition Deals!

 

Business for Sale Information checklist

  • Executive Summary
  • 3 Years Business Tax Returns
  • Interim Financials (P&L, Balance Sheet, within 60 days)
  • Letter of Intent or Purchase Contract
  • Asset Allocation of Purchase Price
  • IRS form 4506-T
  • Original Signatures w/Blue Ink
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Buying a Business with an SBA Loan & Seller Carry

You may be familiar with the term “Seller Carry” or “Seller Carry Back”.  Seller Carry is a portion of a business acquisition selling price that is held as a private note by the Seller.  The benefit of the seller holding a portion of the transaction price as a private note (from seller to buyer) can be what is required to successfully close a business transaction.  It is important that the seller of the business and the purchaser understand what conditions may arise in the construction of the deal and the responsibilities of both parties.

An SBA loan shall still fund the majority of the transaction with standard terms and conditions as they apply through SBA guidelines for the business purchase.  The condition for “Seller Carry Back” may be attributable to the amount a buyer has in cash to inject into the deal.  It can reduce the amount a purchaser has to put down as the portion held by the seller is considered material to the down payment, but certain conditions may be placed on the terms and conditions of this private seller note based on SBA requirements for meeting their guidelines.

v  The Seller Note may be on 5 year standby (both principle and interest) in order to improve cash flow or as the basis to qualify as a portion of equity injection.

v  A Seller’s Private Note may have terms of 8 years – 1st & 2nd year on standby (no payment of both principle and interest for two years), 3rd year interest only, and remaining years fully performing.

v  All other Seller Notes must have a minimum of 8 years for amortization.

v  Split Equity Injection – with 10% down by purchaser and Seller Carry for the balance (typically 10-15%), SBA guidelines recognizes this as meeting the injection requirement.

This by no means is the final terms and conditions for SBA approved loans.  It is merely used as an example of some scenarios that could be presented in order to successfully navigate the selling of a business through an SBA approved lender.

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SBA Equity Investment & Goodwill guidelines

* 15% equity investment for deals with $550k Goodwill or less.
* 25% equity investment for deals with $500,001 Goodwill or more.
* 10% equity investment for partner buyout deals with $500k Goodwill or less.
* 25% equity investment for partner buyout deals with $500,001 goodwill or more.
* Maximum loan amount unsecured without tangible assets is $1.2M (varies by lendor policy).
* Maximum loan amount secured with tangible assets is $3.750M (real estate & equipment).
Note: The above criteria is an example and criteria may vary from Lendor to Lendor.

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Typical Cash Flow add backs

• Net Profit
• Interest
• Depreciation
• Amortization
• Owner’s Salary (less for new owner)
• Employee or management salary if employment
consolidation will occur with transaction
• Case-by-case exceptions (such as; rent if above market rate,
Large one-time expenses, etc.).
• NO EXTRANEOUS ADDBACKS FOR SELLER’S PERSONAL
EXPENSES RUN THROUGH THE BUSINESS (insurance,vehicle, vacations, gifts, children in college, etc.).

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Qualifying for an SBA Project

Business

  • Stable sales Trends
  • Cash Flow Trends

(1.25x – 1.45x subject to collateral)

  • Customer Concentrations
  • Recast Cash Flow w/standard addbacks
  • Complete Financial Information

(w/in 60 days)

  • Will Value Out -3rd Party Valuation
  • Explain issues upfront

Borrower

  • Direct Management Experience

-Profit and Loss

-Employee Management

-Operation Background

  • Net Worth
  • Post closing Liquidity
  • Solid Business Plan with projections
  • Clean Credit History – >640
  • Any Arrests?  Any Bankruptcies?
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Questions to ask your SBA Lendor

• What size loan will they complete uncollateralized
• Will they blend terms based off the business & real estate in a transaction
• Do they offer fixed rates for the full term of the loan
• Do they portfolio their loans or sell on the secondary market
• What other services do they offer, such as lines of credit, equipment financing, payroll services, etc.
• Any prepayment penalties for paying down principal of loan early

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Update on SBA Loan Packages

  • Still 75% Loan Guaranty and Guaranty Fees Apply.
  • New legislation increases SBA loan sizes from $2M to $5M for 7a loans
  • New size standards – 15 Million Net Worth, 5 Million Net Profit

Why SBA Loans are the best solutuion for Business Acquisitions?

 

  • Lowest down payment.
  • Lowest monthly payment.
  • Longest Amortization.
  • SBA will finance collateral shortfalls.
  • SBA guaranty bridges the gap for the risk of ownership change.
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