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You’re the Boss Blog: Are You Sticking With Expensive Financing Too Long?

March 15, 2013 by Leave a Comment
Searching for Capital

A broker assesses the small-business lending market.

I am currently involved in two loan transactions where the small-business owner stands to save substantial money by changing lenders. In both instances, these are relatively young companies that have been working with expensive private money lenders and factors, and their companies have grown to the point where they can now work with the asset-based lending departments at Federal Deposit Insurance Corporation-insured banks.

In fact, both of these transactions are taking advantage of the Small Business Administration’s recently revamped CAPLines program, which is designed to help companies with working capital.

In one on the financings, if the small-business owner chooses to proceed, his finance costs will fall by 75 percent, and his liquidity will increase by 50 percent. In the other transaction, the small-business owner can expect his cost of capital to fall by 50 percent this year.

These decisions may seem like no-brainers, but in both instances the owners are struggling with the decision. They’re both tightly staffed, and they find change frightening. For example, the S.B.A. program will require them to have all customer payments sent to a new post office box, and they are concerned about changing their customer-billing procedures. In addition, they are nervous about upsetting their current lenders. For me, it has been surprisingly tough to get them over the finish line.

In one case, the small-business owner’s existing lender has exacerbated his concerns by telling him that all sorts of bad things will happen if he changes financiers. In my opinion, the lender is simply trying to scare him into thinking that he risks running out of money and losing the ability to finance his production. In reality, the lender just doesn’t want to lose the 40- to 50-percent interest it has been collecting.

I find this lender’s actions deplorable. There is a place in the market for expensive financing, especially when a lender is willing to take on risks that other lenders will not take. But every expensive financing situation should have a plan and a path forward. And all good lenders should be happy when their clients manage to graduate to the next level of financing.

Unfortunately, I suspect that there are hundreds of thousands of small-business owners in more expensive financing arrangements then they need to be. While their businesses and needs have evolved, they’re still doing the same old thing out of convenience and lack of focus.

It’s critical that small-business owners review their debt on at least an annual basis. If your current lending agreements have automatic renewal dates, put them in your calendar — and make sure you’re doing the right thing if you choose to renew. There could be a pot of gold waiting for you if your business graduates to the next level of financing.

Ami Kassar founded MultiFunding, which is based near Philadelphia and helps small businesses find the right sources of financing for their companies.

Article source: http://boss.blogs.nytimes.com/2013/03/14/are-you-sticking-with-expensive-financing-too-long/?partner=rss&emc=rss

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Why Some Business Owners Think Now Is the Time to Sell

December 22, 2011 by Leave a Comment

At the time, however, she was not emotionally ready to part with a business she had started in 1997 and built into one of the largest suppliers of services to television crews and casts in Los Angeles. When her husband suggested selling, “I burst into tears and looked at him as if he were telling me to cut off my arm,” Ms. Finkle said. “Then everything changed, and I realized he was right.”

But the recession hit, and Ms. Finkle’s annual revenue dropped sharply along with declining television advertising and production budgets — making it impossible for her to sell. “I’ve had to work really hard the last three years to save my company and get it back, a lot of times working for free,” she said. “It was no longer about building it, it was about keeping it going until things got better.”

Revenue for 2011 is finally back to 2008 levels, about $1.2 million, and Ms. Finkle is eager to sell. For one thing, she purchased another business, an art studio aimed at children, backed in part by a loan from the Small Business Administration. Moreover, the coming expiration of the Bush tax cuts means that by the end of 2012, the long-term capital gains tax rate will increase to 20 percent from the current 15 percent (unless Congress passes legislation extending the lower rate).

Failing to sell before the end of 2012, she said, could cost her tens of thousands of dollars, “and knowing that motivates me to sell in 2012.”

Ms. Finkle is not the only small-business owner looking to the new year as an opportune time to sell. There is a pent-up pipeline of owners who have had to put off selling in recent years because of the economy. And now that many of these companies have at least one year of profits on the books, they are more attractive to potential investors.

“A lot of these companies are having record profits because they reduced their overhead in the downturn and now sales are coming back,” said John D. Emory Jr., chief executive of Emory Company, a Milwaukee-based investment banking company that specializes in selling businesses with $10 million to $100 million in annual revenue. “A lot of owners have told me they want to start a sale process in the first half of 2012, hoping to complete the sale before the end of 2012. Many owners, especially the leading edge of the baby boomers, wanted to sell in 2008, 2009 or 2010 and would have sold in those three years had the economy stayed strong.”

Those looking to sell are taking steps to appeal to buyers: trimming costs, diversifying revenue, upgrading financial statements and making the chief executive’s role less essential. And they are braced for the sales process to take longer than they would like.

For most owners, the business represents their largest asset, and taxes constitute their largest single expense, said Mackey McNeill, a certified public accountant in Covington, Ky. “The ability to negotiate the best possible selling price and to minimize taxes determines the owner’s financial fate,” Ms. McNeill said.

To illustrate the impact of the expiring capital gains tax cut, Ms. McNeill created hypothetical companies that would sell for $5 million and $10 million each, assuming typical values for equipment, depreciation, real estate, inventory and good will. According to her calculations, and assuming Congress does not act, the owner would save $150,000 in taxes by selling a $5 million company in 2012 instead of 2013. For a $10 million business, the savings would be $325,000. These assumptions cover both S corporations and limited liability corporations, Ms. McNeill said. They would not be valid for a company operating as a C corporation.

The tax savings are an important factor in Joel Lederhause’s quest to sell a majority stake in DiscountRamps.com, a retailer of loading, hauling and transport equipment based in West Bend, Wis. “We won’t continue to grow 15 to 20 percent a year unless we have some outside capital influx,” Mr. Lederhause said. “We want some money to go into the company to accelerate its growth, and take a portion of our sweat equity off the table.”

The company, which projects $22 million in sales this year, keeps about $6 million in finished goods in its warehouse, which limits its growth potential. DiscountRamps.com offers 11,000 different products, and keeps at least one of each item in stock. With an infusion of capital, Mr. Lederhause said, the business could grow to more than $100 million in five years by expanding its product lines into promising new markets.

Article source: http://feeds.nytimes.com/click.phdo?i=92965a9f2de5b751ebf17ae4f595ab20

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You’re the Boss: Newt Gingrich, Small-Business Owner

May 29, 2011 by Leave a Comment

Newt Gingrich on “Face the Nation.”Chris Usher/CBS-TV, via Associated PressNewt Gingrich on “Face the Nation.”
The Agenda

Last Sunday, Newt Gingrich, the former House speaker and current Republican presidential candidate, told America that he was a small-business owner. The revelation came on CBS’s “Face the Nation,” as the candidate tried to deflect questions (PDF) from Bob Schieffer, the host, about his recently revealed debts to Tiffany and Company.

After Mr. Schieffer posited that the debt “just sticks out like a sore thumb,” Mr. Gingrich responded: “If the U.S. government was debt-free as I am, everybody in America would be celebrating. I think I have proven I can manage money. As a small-business man, I run four small businesses. They have been profitable. They’ve employed people. You know, this is the opposite of the Obama model.”

It turns out that Mr. Gingrich — whose interest in small businesses has been previously noted in this blog — has operated at least five companies, according to his spokesman, Rick Tyler. The companies, with one notable exception, mostly appear to be in the business of marketing Newt Gingrich.

For example, Gingrich Communications was responsible for promoting Mr. Gingrich’s public appearances, said Mr. Tyler, including his Fox News contract (canceled when Mr. Gingrich declared his candidacy) and his Web site, newt.org. “It was built on Newt as a brand,” he said. At its height, the company employed 15 people, Mr. Tyler said. However, the company was dissolved once Mr. Gingrich began his campaign. “You can’t have a company manage a brand while you have a campaign manage a brand,” Mr. Tyler said. The campaign has taken over the Web site.

Some of the Gingrich Communications employees went to the campaign, others to a separate company, Gingrich Productions. According to the company’s Web site, it is “a performance and production company featuring the work of Newt and Callista Gingrich. Newt and Callista host and produce historical and public policy documentaries, write books, record audio books and voiceovers, produce photographic essays, and make television and radio appearances.”

Gingrich Productions, Mr. Tyler said, is largely about Callista Gingrich. “It was her company, her vision,” he said. It was originally formed in 2007 as a subsidiary of Gingrich Communications, and today has about five employees. Another former Gingrich Communications subsidiary, FGH Publications, was “responsible for production of historical and fictional novels,” Mr. Tyler said in an e-mail.

Gingrich Holdings, with about three employees, provided back-office support for the other companies in the Gingrich portfolio. Mr. Tyler said that the campaign had not paid the Gingrich companies for anything, including the Web site.

Yet the oldest Gingrich business doesn’t fit this mold — or any other. When Mr. Gingrich organized the Gingrich Group, in 1999, it was a standard-issue ex-legislator consultancy with a diverse roster of corporate clients. (Technically, it was not a lobbying firm.) But eventually Mr. Gingrich became interested in health care reform and “in having an organization that could attract those kinds of cutting edge companies that were providing solutions to some of the biggest problems in health care,” said David Merritt, Gingrich Group executive vice president. “Over time, those nonhealth clients were dropped, and then the Gingrich Group became the Center for Health Transformation.” (Mr. Gingrich sold his interest in the business to his partners when he became a presidential candidate.)

The Center for Health Transformation is now, as Mr. Tyler described it, a “for-profit membership organization” that seeks to foster an innovative, intelligent, and, above all, free-market health care system. About 80 to 90 member companies and organizations pay $5,000 to $200,000 to help shape the debate and, as Mr. Merritt put it, “to participate in developing some of the solutions that we think will transform the system.” A handful of companies remain consulting clients.

It’s an innovative proposition in a couple respects. As a post-Congressional career, Mr. Merritt said, it’s unusual for being “solutions-based and not based on lobbying for a particular company or carrying somebody’s water.” Similarly, he noted, it stands apart from many member-based organizations, which typically take direction from the membership. Finally, it’s a novel model for a public policy organization, since most are nonprofit and tax-exempt.

Mr. Tyler agreed. “I think we invented it,” he said.

Article source: http://feeds.nytimes.com/click.phdo?i=9f4a2c6f322d9f438f2c93ee66c64d52

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Conversations: Wells Fargo Bankers Defend Their Small-Business Lending

May 25, 2011 by Leave a Comment

Among the institutions that took criticism was Wells Fargo, the fourth-largest United States bank and the biggest lender to small businesses. But Marc Bernstein and Douglas Case, the bank’s two top executives for small-business lending, say the criticism was misplaced. In 2010, the bank made $14.9 billion in new loans to small companies, “just shy,” as Mr. Case put it, of a $16 billion goal for the year but more than the $14.5 billion it lent in 2009. In the first quarter of this year, the bank lent $3.7 billion, a 27 percent increase over the first quarter of 2010.

Wells Fargo, like many banks, defines a small business as any company with less than $20 million in annual revenue. But, said Mr. Bernstein: “Wells Fargo historically has put an awful lot of focus on lending to the smallest businesses. That’s why we’re the largest lender in loans under $100,000.”

Mr. Bernstein and Mr. Case spoke recently about lending through the economic crisis and maintaining the bank’s ties with struggling — and angry — customers. This is a condensed version of the conversation.

Q. Why has it been so difficult to approve loans?

MR. BERNSTEIN: First of all, a lot of businesses entered the recession with a great deal of debt. There was a 33 percent increase in the small-business loan balances nationally, between 2005 and 2008. Now that had grown slowly for years, but all of a sudden banks really went hog wild in terms of loaning to small businesses. Then, in some industries we saw sales fall as much as 30 percent. Now, imagine that small-business owner: they’re carrying much more debt than they’ve ever had, sales fall 30 percent, they have negative cash flow, they’re drawing down their reserves. It is highly likely they’re not going to survive another six months or 12 months in a scenario like that, and that’s the sort of thing we were dealing with at the height of the Great Recession. There were people coming to try and borrow more, who already had no visible means of being able to pay their existing debt.

Q. In the past, you have emphasized the consumer debt some of these business owners were carrying.

MR. BERNSTEIN: We saw that in what I call the bubble markets — Phoenix, Las Vegas, Southern California, Florida — a lot of small-business owners borrowed against their house to do whatever. Sometimes to expand their business, sometimes to do what other consumers did, to buy boats and other things. So when the real estate market collapsed, those people were in a very precarious situation as well.

Q. What happened to them?

MR. BERNSTEIN: Well, many businesses have closed in the Great Recession, and many bank loans to small businesses were charged off. The good news is that increasingly the small-business owners who have survived are having an easier and easier time paying their debts.

Q. How much of the Wells Fargo small-business loan portfolio had to be charged off?

MR. BERNSTEIN: From what I see from industry statistics, substantially less than our competitors. If you look at Bank of America’s quarterly earning statements, you’ll see that their charge-off rates got quite high for a while.

Q. Bank of America’s chief executive called his small-business portfolio a “disaster.” Was yours?

MR. BERNSTEIN: Not in my mind. Without meaning to criticize one of our fellow banks, our loan losses never got anywhere near, never approached even the neighborhood that Bank of America reported.

Q. Did you set a lending goal for this year?

MR. BERNSTEIN: We intend and expect loans to increase, but how much will depend on the economy. That’s one of the things that surprised us last year: the economy did not recover quite as quickly as we’d hoped, and loan demand didn’t recover quite as quickly as we hoped.

Q. How is your approval process different now than it was, say, a year ago?

MR. BERNSTEIN: I can tell you how it’s been different from two or three years ago. We use credit scoring — Wells Fargo was the pioneer in the United States in using credit scoring for small business, and it was a way to help us make more small-business loans than we were able to make before. But we have lenders looking at more decisions than we’ve ever had lenders look at before. It’s worth the time for a lender to save applications that the scorecard says are not quite good enough, people who maybe didn’t pass the cut-off score, but are not far from it. By the same token, sometimes the lenders look at applications that score high but have some serious problem.

Q. How does credit scoring work?

MR. BERNSTEIN: Credit scores are developed by looking at thousands of actual experiences where lenders made loans and determining what characteristics of the applicant predicted their likelihood of default. You look at 50 or 70 characteristics or more of an applicant — variables related to credit history, and also aspects of the business itself — and then you mathematically determine how does each of those contribute to the likelihood of going to loss.

Q. How often does an application that gets a second look end up getting approved?

MR. BERNSTEIN: That’s proprietary, but often enough that it’s worth our while to do it, and it’s a lot of peoples’ time.

Q. The financial industry market researchers Greenwich Associates surveyed small-business borrowers and found that the biggest banks not only failed to keep ties to small borrowers, they often actively severed them. Do you think Wells Fargo has to re-establish trust with the small-business marketplace?

MR. CASE: We never retreated from small business. And not to talk about competitors, but if you look at different approaches to small business, some came and went, and came back again, or will need to come back again. We’ve always been dedicated to this space, and this customer segment.

MR. BERNSTEIN: We are cognizant that the situation was ripe for people to feel like we weren’t serving them, and we tried to do whatever we could reasonably do to help our customers — and be very conscious of the fact even the customers we were calling to collect were often good people having tough times.

Q. Do you understand why so many small-business owners seem to feel big banks got a bailout and then did nothing to help small businesses?

MR. BERNSTEIN: A lot of people who frankly are not very good credit risks and who want a loan, I can understand their frustration. But Wells Fargo has been committed to small-business lending for a quite a while now, and we know here that we don’t help our customers, our communities or shareholders by declining a good loan.

Q. We get a lot of comments from readers who feel they have been mistreated by their banks, and some of them name Wells Fargo.

MR. BERNSTEIN: That’s hard to understand, because we’re definitely doing more small-business lending than other banks.

MR. CASE: We’re doing everything we can to say yes to every single loan that’s possibly approvable.

Article source: http://feeds.nytimes.com/click.phdo?i=a5c82a211c57174f50133bc87969e2df

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You’re the Boss: Battle Hymn of the Small-Business Tiger Mother

May 9, 2011 by Leave a Comment

Transaction

As usual on this Mother’s Day, I found myself not only being waited on by my husband and two sons but also reflecting on my own experiences of motherhood and how I’m measuring up. As a mother and small- business owner, I often find myself squeezed by the double whammy of guilt: time spent in my business is time spent away from my kids, while time with my kids is time away from my business. They all need me, and the struggle to “be there” is ongoing.

And just when you think you have your mommy guilt in check, along comes a bombshell like Amy Chua’s recent book, “Battle Hymn of the Tiger Mother.” For those who missed the hype, the book is an account of Ms. Chua — a professor of law at Yale — raising her two daughters the traditional Chinese way. In short, discipline is the order of the day, and anything but first place and straight A’s is considered a disgrace. Not surprisingly, a global debate ensued, with the first page of the book garnering much of the attention. It provides a list of things Ms. Chua’s girls were never allowed to do: attend sleepovers, play any instrument other than the violin and piano, watch TV or play video games. (And I thought TV and video games were not only acceptable diversions but could also substitute for an hour of “babysitting” in a pinch.)

After months of screwing up my courage I finally read the book, which was less damning and more entertaining than I expected. Upon learning more about what makes the Tiger Mother tick, I found myself wondering if there were parallels between how the Chinese raise their children and how they run their businesses. I decided to ask.

Chia-Li Chien is a business consultant and financial adviser who moved to the United States in 1988. While her daughter claims Chia-Li is a Tiger Mother, Ms. Chien says that — after 22 years in the United States — her opinions have become largely westernized. “My mother was a Tiger Mother,” she said.

When I asked her about business ownership, Ms. Chien pointed to the Chinese preoccupation with money and profitability, which is sometimes perceived in the West as being cheap. “Most Chinese-run companies in the U.S. are cash-flow positive,” said Ms. Chien, adding that they tend to have very little debt because of their diligent efforts to manage expenses and focus on top line metrics like sales volume and margins. According to Ms. Chien, money is a motivator at every level of a Chinese business, with owners making liberal use of cash incentives like bonuses for employees. “Money is the motivator, not the fluffy stuff,” said Ms. Chien.

“We probably spend more time analyzing costs than some Westerners. We calculate and re-calculate” said Rong Murphy, founder of Food Processing Technology Innovations and a former associate professor at the University of Arkansas. Like Ms. Chien, Dr. Murphy mentioned the Chinese aversion to debt and the relentless pursuit of cost savings. Regarding the western perception of cheapness, Dr. Murphy had an alternative explanation: “It may be that Chinese do not want to spend money that cannot be translated into profit.”

Rob Slee, founder of MidasNation, who has worked with many Chinese small-business owners and who will be on a speaking tour in China this fall, said, “I believe that comparisons abound between how Chinese raise their kids and how they run their businesses.” In Mr. Slee’s experience, a Chinese small business embodies the following ethos:

1) Every penny matters.
2) Everyone has to earn his or her keep and add value.
3) Appreciation of the asset is the driver.
4) No excuses for failure.
5) Set goals high and then achieve them.

While Mr. Slee thinks Ms. Chua’s now-famous parental restrictions are unnecessary to develop a child to his or her fullest potential, he believes the Chinese notion of expecting and then demanding excellence — whether it is from kids or businesses — is correct. “I’m not sure how many American business owners are holding themselves to the same level of achievement.”

Mr. Slee — an academic himself — offered me a bit of comfort this Mother’s Day, noting the importance of striking a balance between the rote learning and linear analysis of left brain thinking and the creative design associated with the right brain. “One without the other leads to a limited worldview,” he said. “Getting all A’s means that a student highly conforms to the environment. And non-conformance is the mother of successful business ownership.”

Barbara Taylor is co-owner of a business brokerage, Synergy Business Services, in Bentonville, Ark. Here is her guide to selling a business.

Article source: http://feeds.nytimes.com/click.phdo?i=1a08d8a36433472b00c53c71ff870099

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