Loren Marc Schmerler, CPC, APC, President and Founder of Atlanta based Bottom Line Management, Inc. recently shared how to apply and obtain a SBA loan for those interested in buying a business during "What You Need to Know When You Are Ready to Sell or Buy a Business or Franchise"  free monthly seminar hosted by The Edge Connection, community partner with Coles College of Business, Kennesaw State University.

Once you have found the business of your dreams, you need to figure out a way to purchase it. One way is if you have the proverbial “rich Uncle” who can write a check for the entire purchase amount. The probability of this happening is less than 1%. Or you can go to your parents, siblings or other relatives. The probability of this happening is less than 5%. Perhaps your friendly banker will make you a conventional loan. The probability of this happening is less than 10%.

How then do you improve your chances of getting the money you will need to buy the business in question? Well, if you are like most first time buyers, you will need a SBA loan to buy the business. And if this is your first time down the SBA path, the process is somewhat overwhelming and time consuming. Also, you need to understand that the SBA does not make loans. They insure loans. The SBA Preferred Lender makes the actual loan.

1. Step one is to obtain the 2 most recent tax returns for the business. So if we are in August of 2011, you will need to obtain the 2010 and 2009 tax returns for the business. The SBA Preferred Lender will apply a formula to a calculated figure called Owner’s Discretionary Cash Flow also known as Seller’s Discretionary Earnings. This figure starts with Net Taxable Income from the Tax Return or Net Income (or loss) from the Income Statement and then certain line items are “added back.” The items that are added back include owner’s compensation and perks, depreciation and amortization because they are non-cash items, one-time non-recurring items, interest because it is different for each owner, etc.
2. When the preceding number is determined, the SBA Preferred Lender will apply a formula where they take the anticipated debt service (principal plus interest) and multiple it by 120 percent. They want to make sure that the business can pay back the loan without going into default. They are less concerned with the borrower’s credit score than they are concerned with the company’s ability to pay its bills.
3. Once the SBA preferred lender knows that the business can pay back the loan, they then start making you jump through additional hoops. You will need to complete a very long application that can run 30 pages in length. You will need to draw up a business plan that includes assumptions and strategies.
4. The SBA preferred lender will require that a 3rd party business valuation is performed. They will also require that you obtain term life insurance for the term of the loan. Most SBA loans for businesses sold without real estate have 10 year maturities. If real estate is included, the term can be more than 20 years or less than 20 years.
5. The loan process can take from 4 to 6 weeks if everything goes smoothly. If complications arise, it can take longer.

The preceding steps constitute a crash course in applying for and obtaining a SBA loan.

To learn more about applying and obtaining a SBA loan or how to buy or sell a business register for Bottom Line Management, Inc.'s free seminar "What You Need to Know When You Are Ready to Sell or Buy a Business or Franchise" >>

Loren Marc Schmerler, CPC, APC is President and Founder of Atlanta based Bottom Line Management, Inc. He has been a business broker since 1986 and a business consultant since 1970. His accomplishments include being the original and only Business Advice Columnist for Wal-Mart’s Sam’s Club.

Use your superior customer service skills and clean up with this business.

A successful cleaning service has been strategically cultivated where the owners of this cleaning service never get their hands dirty. They take leads and convert them into satisfied customers. This business grows heavily through referrals and repeat business.

The growth potential for this company is great, as the employees are loyal and dependable and the repeat customer business is high. Expansion includes targeting apartment complexes and assisted living homes as customers and additional window cleaning services.

Work hours are Monday – Friday from 7:30am to 5:30pm. Fifty percent of the customers are bi-weekly, 25% are specials and 20% are four-weekly. Each employee is responsible and gets the job done. Bids can be given over the phone or in person.

General Information

• Location: NW Atlanta, Cobb County, Georgia 30101
• Facilities: 1,100 sq. ft.: $995/mo.: cam $113/mo.: utilities run $200/mo.; telephone /Internet runs $220/mo. Lease expires 5/31/11.
• Competition: There are many home cleaning services, but this service has very little turnover.
• Growth and Expansion: More targeted marketing. Additional services like window cleaning. Pick up apartment complexes and assisted living homes as customers.
• Support/Training: Owner will work with new owner for 2 weeks. New owner must have 1 week of training with Franchisor.
• Reason Selling: Early retirement
• Year Established: 2004
• Employees: 6 Full-time

Financial Information

• Asking: $225,000
• Gross: $251,510
• Cash Flow: $79,359
• Financing: $100,000 Down And $125,000 @ 6% Over 10 Years With 5 Year Balloon.

Contact Information

Contact: Loren Marc Schmerler, President, CPC, APC
Phone: 404-550-1417
Email: lms@botline.com

Well established business offering over 24 years of excellence in the granite and marble counter top business offering service directly to consumers and builders. This business has a strong reputation for being the top quality of counter top manufacturing and installation in Norcross and Gwinnett County, Georgia. The facility offers top notch equipment and can work with glass, aluminum and wood.

This is an outstanding opportunity for anyone who is looking to be successful in a special trades business to acquire a leader in the granite and marble counter top manufacturing and installation business.

This company makes its own unique products separating itself from its competitors!

For more information contact: Loren Marc Schmerler, President, CPC, APC Phone: 404-550-1417 or Email: lms@botline.com.

Location
Norcross, Gwinnett County, Georgia 30093

Financial Information

• Asking: $500,000
• Gross: $288,082
• Cash Flow: -$61,025
• Furniture, Fixtures & Equipment: $465,000
• Inventory: $35,000 (included in price)
• Financing: $250,000 down with $250,000 @ 6% over 10 years with 5 year balloon.

Summary Description
The owners of this business seek to pass the baton after 24 years of excellence. The facility has incredible equipment including 2 Brembana CNC Routers valued at $200,000. The cost to replace this equipment would be $400,000. There is a Comandully CNC Staright Edger with a fair market value of $100,000 that would cost $180,000 to replace. There is a Bridge Saw with a fair market value of $50,000 that would cost $85,000 to replace. This facility can work with glass, wood, and aluminum. Work hours are Mon – Fri 7 – 4. One machinist has been with the company since 1986 and the salesman has been with the company since 1991. The owners have not paid themselves for the last 2 years. Certainly, you can do better than this.

General Information

• Facilities: 30,000 sq. ft. Rent should be $8,032.50 but is currently $4,016.25. Owners are behind in rent. They are not on a lease.
• Competition: There is a great deal of competition, but this company does very high quality work and installation.
• Growth and Expansion: More creative marketing needs to be targeted towards consumers and away from builders.
• Support/Training: Owners will provide 4 weeks of transitional assistance.
• Reason Selling: Retirement and medical.
• Year Established: 1986
• Employees: 3ft + 1pt

Learn more about this specials trade business today, contact 24/7:

Contact: Loren Marc Schmerler, President, CPC, APC
Phone: 404-550-1417
Email: lms@botline.com

Tip #1: Make sure you really want to sell your business.

First, ask yourself the tough questions: Are you bored, burned out, ill, have a new child, have aging parents that need your assistance? Or, are you simply unhappy with how much money you are making? If you’ve answered yes to any of these questions, you may not need to sell your business. Quite possibly, what you may need is some guidance to get it back on the right track.

An experienced business consultant can help you refocus to see the forest for the trees. You might find out that once you start making enough money, you do not want to sell after all. But, if you conclude that selling is what you want to do regardless of any of the above-mentioned variables, then you should proceed to the next step.

Tip #2: Rate the “curb appeal” of your business.

After you are 100% sure that you want to sell your business, I suggest that you drive up to your business to determine if the following applies to you: Are there any potholes in your parking lot? If so, fix them before a buyer shows up. Is the landscaping out of control or unappealing? If so, replace it with attractive shrubbery that is well-maintained.

Are the windows clean? If not, get them washed. Is the building exterior clean? If not, schedule a professional pressure washing. Does the roof look old or damaged? If yes, then make the necessary repairs. Does the building need to be painted? If so, get it done.

In brief, be objective to ensure the “curb appeal” of your business has no obvious and easily correctible issues. This may seem like overly simplified advice, but remember that a buyer will be paying a considerable sum of money for your business. You don’t want to turn a prospect off with a bad aesthetic first impression.

Tip #3: Look around the inside of your workplace.

Once you have fixed any exterior issues with your business, it is now time to examine the interior from top to bottom. Start with the ceilings. Are there any water stains from roof leaks? If so, fix the leaks and replace the tiles. Are there any light bulbs that need to be replaced? If so, get on a ladder and put in new and shiny bulbs. Does any of the furniture look ratty? If it does, either repair it or replace it.

Are there scrape marks on the walls? If yes, then have them repainted. How about your employees’ desks? Do they look organized or out of control? Insist that your employees maintain neat and orderly working areas. How about the rest rooms? Are they an embarrassment? If so, clean them up and keep them tidy. Are they handicap accessible? If not, make arrangements to bring them up to code.

Most importantly, look at your office with a keen eye. Remember that when a buyer tours your business, you want them to visualize becoming the owner and being proud to do so.

Tip #4: Evaluate your infrastructure.

After you have fixed any interior “physical” issues with your business, it is now time to look at job descriptions, policies and procedures. First and foremost, you need to draft your own job description that covers what you do daily, weekly, monthly, quarterly, semi-annually and annually. It should be very detailed, and make certain you have someone proofread the final product and correct any errors.

After you are satisfied with your job description, ask all of your employees to complete theirs. This process has several benefits: First, your employees will see how much they actually do. Second, it will give you a chance to see if they are doing what you think they are doing. Third, it will tell you whether they are doing what they should be doing. When all the job descriptions are complete, place them in an organized binder labeled “Job Descriptions.” Then, you will move on to policies and procedures.

Tip #5: Assess your policies and procedures.

Now that you know what you do and what all your employees do, it’s time for policies, procedures and controls. With regard to employees, you need to cover hiring, evaluations, probations, vacation, sick days, holidays, etc. If your company has positions where employees must have background checks, drug tests, reference checks, etc., you need to speak with a labor attorney to dot all your i’s and cross all your t’s.

When asking a prospective employee to complete an application, it is best to stay away from questions that deal with pregnancy, military status, race, national origin, etc. If you decide to hire an employee, make sure they complete a W-4 form, an I-9 form and the appropriate state form. Should your labor pool have a large number of Hispanics, you will need to consult with a labor attorney to insure you do not hire illegal immigrants. Severe penalties can result. With regard to vacations and sick pay, it is best to let them accrue a day or less for each month worked. More policies and procedures will be discussed in Tip Number 6.

Tip #6: Stay current with all your employee evaluations.

It is very important to stay current with all employee evaluations. Employee morale can be devastated if reviews are delayed or not given at all. Plus, it is grossly unfair to ask a new owner to review employees with whom he or she has never interacted. A prospective owner will most certainly ask about employee turnover and employee tenure. But one question that is rarely or ever asked is whether you have any “problem” employees.

That brings up the issue of probation. Probation can be a way to successfully rehabilitate a wayward employee, or it can be the final process to document a termination in such a manner that a legal challenge to the termination will not prevail. When an employee is put on probation, the leash should be very short. The employee must know exactly what behavior will be tolerated and what behavior will lead to immediate termination. Interestingly enough, putting a person on probation sometimes leads to an outstanding employee.

Tip #7: Keep your financial statements current.

Nothing frustrates a prospective purchaser more than asking for current financial statements and tax returns and being told that they are not available. Worse yet is being told that a date cannot be given for when they will become available. Talk about red flags. How can you run a business without current and accurate financial statements?

The short answer is that you cannot do so. As a business owner, you must anticipate the purchaser’s questions regarding all financial matters and have current statements to defend your answers.

When I say financial statements, most people think of a profit and loss statement (also called the income statement.) But the balance sheet is equally important. The combination of these statements tells you whether a business is losing money and gives you a picture of the company’s financial health. There are certain subtleties to keep in mind. For instance, a high level of inventory can indicate several different things. Maybe much of it is obsolete or slow moving. It can be a purchasing mistake that will hurt a business or a brilliant purchase at a great cost. Only with thorough investigation will you determine the true answer.

Tip #8: Ensure your tax returns are in tip-top shape.

Have you filed all your tax returns? Specifically, I mean monthly sales tax, monthly state withholding, quarterly payroll taxes, quarterly state unemployment insurance, annual unemployment insurance, annual ad valorem, annual corporate tax, annual state tax and any local, county, city or other special taxes.

It is absolutely critical that you are current with all these returns to instill confidence in your business’ prospective purchaser. But when it comes to sales tax, if you have not filed and paid all returns, there are very negative consequences. The penalties and interest are exorbitant, but in addition, unpaid sales taxes become the responsibility of the new owner. I was once at the closing table waiting for the checks to be written when the Georgia Department of Revenue called and told the closing attorney that the seller had not paid sales tax for the last 3 years. Upon hearing this, the buyer stood up and left the closing. Needless to say, the company was not sold and eventually shut its doors.

While we are on the subject of taxes, you need to have a heart to heart talk with your CPA regarding taxes when you sell your business. Should the sale be an asset sale? Should the sale be a stock sale? There are bona fide reasons for each type sale. An asset sale limits your exposure for past liabilities, errors and omissions. An example would be a product liability claim for a structure or machine that becomes faulty. A stock sale allows for ease of transferring contracts presently in force. A stock sale is also critical in the medical industry when a Medicare number might be involved. But there is another angle. The stock sale allows for the company to be sold for less money while still letting the owner realize the same or greater after tax position.

Tip #9: Understand the meaning of due diligence.

What is due diligence and how do you prepare for it? Due diligence is the process where the buyer tries to validate everything you have represented both verbally and in writing. The buyer will scrutinize your financial records, your legal records, your employment records, etc.

With financial records, the process starts with the tax returns, goes backwards to the financial statements, goes backwards to the general ledger, goes backwards to all source documents that include bank statements, deposit slips, check stubs, cancelled checks, vendor invoices, client/customer statements, etc.

To prepare for the financial side of due diligence you should assemble tax returns, financial statements, general ledgers, bank statements, deposit slips, check stubs, cancelled checks, vendor invoices, client/customer statements, etc. for the last 3 years. Tax returns, financial statements and related items should be in date order from the most current to the oldest. Vendor invoices and client/customer statements should be in alphabetical order first and then in date order for each vendor or client/customer. Employment records should be filed alphabetically, but you better make sure you have a W-4 form, an I-9 form and a state form (G-4 for Georgia) for every employee.

Tip #10: Tie up your legal loose ends.

There is a legal side to the due diligence process as well. Are you a valid legal entity such as a partnership, corporation or LLC? Is your annual filing of officers and registered agent current? Have you maintained your Corporate Minutes and held annual Board of Directors and Shareholders meetings?

Do you have outstanding liens for debts that have been paid off? If so, you need to contact the creditor and ask them to remove them. If this is not done, the closing attorney will have to withhold funds in escrow until the actual status can be determined.

Have you paid all of your payroll taxes? If not, you may have undermined a possible sale. Have you paid all sales tax that is due? If not, I can tell you from personal experience that this can demolish a probable sale. Is there any outstanding litigation that affects you as either a plaintiff or a defendant? Are all your employees legal, and do you have proof? Are there any patents, trademarks or service marks that need to be protected? If real estate is involved, do you have a deed to prove ownership? Do you have a plat that clearly shows boundaries of the property? Do you have any contracts with vendors or clients/customers? Is your company minority owned, and if so, how would a change in ownership affect your business?

Author’s note. After helping sellers and buyers for more than 20 years, I have found that honesty, integrity, full disclosure, patience and a willingness to consider various alternatives makes the probability of success for all parties very high.

Today’s question is from Charlie in West Cobb. Charlie is thinking about buying a business where the tax returns do not agree with what the owner says he really makes from the business. Charlie wants my counsel on what to do.

Listen to the following podcast for the answer…

Unreported Income [ 6:33 ] Play Now | Play in Popup | Download

Or, read the answer here:

First and foremost, I am not an attorney and cannot give legal advice. Second, I am not affiliated with the IRS or any law enforcement agency. Third, I am going to recite “stories” I have heard from “other” brokers during the last 23 years.

Let’s go case by case. An owner of a trophy shop said he was earning $145,000 from his business, but the tax return said $98,000. To prove the missing $47,000, he walked over to a desk drawer and pulled out a stack of customer invoices that all said “cash sale.” The buyer ran an adding machine tape on the 14 inch high stack, and the total came within $700 of the correct difference. The buyer then went through an entire year’s deposit slips and bank statements and discovered that never once was any cash or checks deposited. Only credit card sales were shown. The buyer concluded that it was very probable that the invoices were legitimate and that the owner kept all cash and checks from the business as unreported income.

The next situation was where the owners of a pizza parlor claimed they were making more than $100,000 a year but their tax return showed $49,000. The buyer asked the owners to prove the missing sales figures. The husband went to his Point of Sale cash register and printed out a very, very long report. The report showed sales by day, by week, by month and for the year. Then he printed out a second report that showed “voided transactions.” The total of the voided transactions report was $56,000. So the tax return plus the voided transactions report totaled $105,000, and the buyer bought the business.

The next situation is absolutely the most unbelievable story I have ever heard in 23 years of being a business broker. Two men who owned a liquor store said they would not sell for less than $300,000 all cash. They guaranteed a minimum inventory of $50,000. Their tax return showed that they earned $55,000, but they claimed they were making $159,000. When asked to explain the difference of $104,000, they said that each of them withdrew $1,000 cash a week for a combined total of $104,000. But the broker and the buyer wanted “proof” of this. The owners then pulled out 16 years of over-sized multi-column accounting spreadsheets. The older years were clearly very, very old, and the more recent years looked cleaner.

But the next part of the story is the 8th wonder of the world. They had kept track of sales for the past 16 years, not by year, not by month, not by week, not by day but actually by “hour.” As unbelievable as this may sound, they could tell you how much product they sold between the hours of 2:00 p.m. and 3:00 p.m. March 26, 1987 or between the hours of 9:00 p.m. and 10:00 p.m. on a Friday night in 1991. When the buyer saw the extraordinary “accounting records” they had been maintaining, he wrote them a check for $300,000 without any further due diligence.

The next situation is not outrageous like the last one. A buyer wanted to buy a light manufacturing company. When he compared the tax return to what the owners claimed they had made from the business, the difference was $22,000. The buyer asked the owners to prove where the missing $22,000 could be found. They went to a file marked “confidential” and produced photocopies of checks that had been written to them personally during the year. These checks totaled the exact amount that was missing, and it was obvious that they were never deposited into the company checking account.

I could go on and on with other stories, but the old adage “buyer beware” certainly applies in all cases. There is a reason for “professional due diligence” using a CPA firm. You want to avoid making the mistake of your lifetime by believing something too good to be true. You need to obtain “unassailable proof” before taking the plunge, and when in doubt, run, don’t walk from any situation where the owner has to work too hard to “convince” you of what he is making that cannot be supported by tax records validated with the IRS.

Author’s note. After helping sellers and buyers for more than 20 years, I have found that honesty, integrity, full disclosure, patience and a willingness to consider various alternatives makes the probability of success for all parties very high.