Cash for Impact

I listened to a commercial real estate webinar on Loopnet and thought I’d share some of their takeaways and my own with you. Most small and medium business owners do not pursue purchases of commercial real estate unless they are a commercial real estate or related entity or they are considering or have purchased the property that their business resides in. There are a few who may pursue commercial real estate investment as a separate asset class to diversify their investments. This blog focuses on small business financing and not personal, so this blog entry is targeted to those who purchase office, industrial, or other commercial property to house their respective businesses.

If you are currently pursuing financing for a commercial real estate deal, make sure you do the following:

• Be realistic in specifying and designating expenses. Be conservative in your estimates on income, ie., your projections.
• Be clear and upfront about your personal financial position. If you are using other commercial real estate as an asset, make sure you are realistic about the current value of that real estate.
• Underwriting standards are tighter. The focus of any lender or investor will be on debt service coverage and the associated debt service coverage ratios. Make sure the property you are buying will generate the operating and net income to have coverage and ratios well within the minimum for that lender or investor.

Who’s funding commercial real estate investment?
There are still a number of banks funding owner-occupied commercial real estate. Therefore, if you are a profitable, cash flow positive company looking to purchase the building you operate from or will move into, and you have been in business for at least three years and have the financial records to prove this, you have a number of banks and other options to choose from. For those pursuing commercial real estate as a separate investment, options still exist. These include insurance companies, banks with foreign parents, and the “too big to fail: banks.

• Insurance companies. These never really left the commercial real estate market. Why not? Insurance companies continually bring in money through insurance payments made by the insured. Since insurance companies invest large sums of money on an ongoing basis, they allocate portions of their portfolio to various types of investments. Most insurers allocate a portion of their portfolio to commercial or industrial real estate investment. To take advantage of the the revaluation taking place in the market, insurance companies currently appear to favor commercial real estate purchased out of foreclosure or bankruptcy or some other type of restructuring.
• Banks with a foreign parent . These have been able to balance their loan portfolios globally and shift assets around from the US to elsewhere. Thus, in general, they’ve largely been able to mitigate their exposure to poor or underperforming US loans.
• “Too big to fail” banks. These banks wrote down a lot of their non-performing or underperforming real estate assets. They are also continuing to work within their loan portfolios to manage assets to prevent an all or nothing scenario. Inquire about the loan portfolio exposure on a regional level for these national banks to ensure that they have tolerance for your particular deal.

If you want to know more about the commercial real estate market in your area, the market and property dynamics, and what’s available for sale, check out Loopnet. I’m a big fan and have used them a lot in the past.

Technorati Tags: commercial real estate financing, Loopnet

Someone recently asked me to provide them with a list of the advantages and disadvantages of buying a business vs. starting a business. There are inherent risks in both business acquisitions and business start-ups. Some people have a profile better suited for one over the other. Here is the list I provided the individual.

Advantages of buying a business:
1) Assuming the business is profitable and has been for at least two years, you gain easier access to bank financing and other financing entities because the business has a verifiable track record.
2) You already have customers and potential customers.
3) You have an operational infrastructure – personnel, IT, processes, etc.
4) You have a proven product or service.
5) You have operational cash flow (again, assumes you purchase a profitable enterprise).
6) You can leverage the existing customer base or product to sell your new product or add-on service offering.
7) Business may already have a D&B profile and established business credit.
You have employees and management who can help you better understand the business and its operating environment.

Advantages of starting a business:
1) You can operate virtually and start on a shoestring budget.
2) You can establish and mold the company culture as you wish.
3) You can move as quickly or as slowly as your lifestyle and desires dictate.
4) Essentially, you (or you and your fellow founders/investors) have complete freedom to do what you want, within legal and financial limits, until your company reaches a certain point.

Disadvantages of buying a business:
1) You may not do sufficient due diligence and end up with serious problems you didn’t foresee.
2) The company may have unknown legal or environmental issues that could crop up 1-3 years later.
3) You could lose a major customer soon after purchasing the business. (Then you’d have a business which isn’t worth nearly what you paid and/or on which you can’t make the payments.)
4) You may not like the employees and/or management.
5) You may have customer service or employee morale issues, or both.

Disadvantages of starting a business:
1) Difficulty obtaining sufficient start-up capital.
2) Until you have the funds to hire others, you must handle most of the functions yourself.
3) If you do not have an advisory board, you have to consider all decisions – strategic, operational, financial, etc. – on your own, until you can hire management.
4) You have to develop a product or service and find customers for that product/service from scratch.

Technorati Tags: business acquisition, small business start-up

In a continuation of our discussion on accessing alternative financing to obtain the capital to build your business, we’ll turn to financing acquisitions. It’s important to be creative when finding money to buy a company, especially now when credit markets are tighter and a number of community banks, typically big funders of certain acquisitions, are encountering difficulty due to their degraded residential (builders) loan portfolio.

Here are some options for financing acquisitions:

• Owner financing / seller financing - Go to the seller first. Who is better prepared to finance the business than the person or company who owned it? They know the business better than anyone and are most familiar with its risks. In the current environment, you should be able to get 40-70% of the business financing via owner financing. You must convince the seller you’re a good risk, just as you would a bank.
• Supplier or vendor financing – The target company’s suppliers and vendors are a good source of financing. Their business is likely to increase under your new ownership. (i.e., If you don’t intend to grow the business, why would you buy it?) Leverage that growth in their business for financing from them. If the target company has been a good customer, the supplier is knowledgeable about the business and will understand the inherent risks better than a typical bank.
• Mezzanine financing – Mezzanine funds that serve the small and medium markets raised large sums of money before the market meltdown. They therefore have money to spend and are looking for great opportunities. With fewer people and companies making acquisitions right now even though multiples are very low, now is a great time to obtain mezzanine financing.
• Bank debt – If the target company has a lot of medium to long-term assets in addition to good cash flow and a strong profit margin, you should have little problem finding bank financing. However, if you want a service company which has a lot of receivables and other short term assets, you may encounter difficulty. Find a bank that has a history of financing the type of company you’re buying. Also, talk to the seller’s banker. If the seller has a strong banking relationship, the banker will know the business well, increasing the likelihood that that bank will provide financing in order to retain the relationship and deposit accounts.
• Receivables financing – If you find it difficult to obtain bank financing, pursue account receivables financing firms. They can provide term loans and lines of credits against the receivables. Yes, the interest will be higher but they are more familiar with receivables financing and thus often more comfortable with lending against them.
• Pre-paid sales – Approach the target’s customers and ask them to make a bulk purchase or pre-pay for several month’s or a year’s worth of products or services in exchange for a strong discount.

There are other alternatives, some of which may be unique to your particular business. These are some options to stimulate your own creative thinking and approach.

Technorati Tags: acquisition financing, mezzanine financing, owner financing