Some financial-related terms involving property acquisitions are often spelled out, while others aren’t as clear.
By Mark Battersby, Contributing Editor
Thinking about merging with or acquiring another convenience store or business?
Mergers and acquisitions (M&As) can help a business expand, acquire new knowledge, move into a new area or improve buying power with one simple transaction. However, along with these benefits and opportunities often comes great expense for both parties.
Sure M&As are expensive, and without large amounts of spare cash on hand, convenience store operators, executives and owners will have to seek out alternative financing options. Fortunately, there are a number of different methods for financing M&As, with the method chosen depending not only on the state of the business, but also on overall activity in M&A and financing at the time of the transaction.
MERGERS AND ACQUISITIONS
The term “mergers and acquisitions” (M&As) includes a number of different transactions such as:
Merger: In a merger, two businesses merge together with the acquired business ceasing to exist, becoming part of the acquiring business.
Acquisition: In a simple acquisition, the acquiring convenience store business buys or obtains a majority stake in the acquired firm, which does not change its name or legal structure.
Consolidation: A consolidation creates a new entity. Shareholders of both business receive equity shares in the new consolidated business.
Asset Acquisitions: In a purchase of assets, one business acquires the assets of another business. The business whose assets are being acquired must obtain shareholder approval. Most commonly employed during a bankruptcy where businesses bid for the various assets of the bankrupt operation and the bankrupt business is liquidated after the final transfer of assets to the acquiring business(es).
LET THE SELLER PAY
In many ways, seller financing is the easiest form of financing the purchase of a business. The buyer makes a cash down payment and the seller, acting like a bank, finances the remainder of the purchase, with payments made to the seller over time.
The amount remaining to be paid to the seller can be in the form of a promissory note with equal payments for a set period, or a so-called “earn-out” where payments are tied to performance of the business going forward. Either way, the buyer benefits because the seller has a strong interest in the business’s success under the new ownership. Seller financing is a flexible option, because terms are fully negotiable and is often the faster route to a closing.
CASH FROM MANY SOURCES
Paying cash in a M&A deal is an obvious alternative for an exchange of stock. Cash transactions are, after all, instant and mess-free. Plus, cash does not require the same kind of complicated management as stock would.
Unfortunately, while cash payments are often the preferred method, the high cost of M&A transactions may be too rich for the pocketbook of the convenience store business. But, there are ways of obtaining the needed cash from others ahead of an upcoming M&A transaction:
Loans: If the targeted business has a lot of assets, positive cash flow and a strong profit margin, a buyer should be able to find bank financing. In situations where the value of assets is close to the purchase price, conventional bank loans and equipment financing can be viable options. In this case, a buyer borrows money from the bank with the assets as collateral.
The buyer then pays the money to the seller. Quality of cash flow, debt load and insufficient collateral are often cited as primary reasons for rejections.
Asset-Based Funding: The primary difference between asset-based lending and traditional lending is what the lender looks for when underwriting a loan. A traditional lender will look first to the cash flow and then to collateral. An asset-based lender looks to collateral first, debt loan and quality of earnings. The main drawback to asset-based loans is the expense—with interest rates usually far above that for conventional financing.
Crowdfunding: Today, crowdfunding, in all its guises, is increasingly used for traditional business purchases. While raising enough capital for a purchase, crowdfunding may generate the cash flow required to secure a larger conventional loan. And, don’t forget the latest crowdfunding wrinkle—the ability to both borrow from and sell stock.
Mezzanine Financing: Mezzanine financing is a hybrid of debt and equity financing and, not too surprisingly, it is often sponsored by the U.S. Small Business Administration (SBA). A mezzanine deal involves a number of technical terms: senior and subordinated debt, private-placement transactions and equity investment. Senior debt refers to loans from sources such as banks and secured by liens on specific corporate assets, for example, property or equipment. Equity is usually in the form of preferred stock. As a buyer, the convenience store operator won’t have to give up as much control; frequently it appears to be footing the bill for 20% of the price of the target company.
OTHER OPTIONS
Business acquisition loans are defined as any loan acquired for the sole purpose of purchasing a business—and are notoriously difficult to obtain. Although there is no type of loan exclusively for business acquisitions, the small business products already outlined are more than suitable for business purchases.
Due to a high rate of rejections, many convenience store operators turn to the SBA. Serving a role similar to a broker, the SBA does not actually lend money but, rather, serves as a third party working with established lenders to guarantee all or part of smaller business loans.
Among the advantages of SBA loans are the exceedingly long repayment periods. If real estate is involved, a 25-year repayment period is not unheard of. The usual 7(a) loan—when other assets aren’t involved—generally has a 10-year payoff unlike a traditional bank loans, which are usually for only 5-10 years.
A convenience store business with strong finances can often obtain 100% financing. In addition, SBA loans are typically used to finance a collateral shortfall, an invaluable perk for businesses without a lot of hard assets.
Naturally, there are some drawbacks to working with SBA loans. The SBA lending process can be difficult, even Byzantine, at times as well as relatively slow with an almost overwhelming amount of paperwork. While there is also a requirement that anyone owning 20% or more of the convenience store business must personally guarantee the loan, since the SBA has eliminated its personal resource limitations, borrowers and investor groups with high net worth and liquidity are now usually eligible.
The Small Business Jobs Act of 2010 changed the lending limits for SBA loans. The limit for the SBA 7(a) program increased to $5 million making the program a viable option for many convenience store operations and businesses. Plus, there is the SBA’s Preferred Lender program, often with working capital loans and lines of credit, for potential financing packages in excess of $5 million.
Tips that SBA Loan Applicants Should Know
What are Small Business Administration (SBA) loan officers looking for when approached about a loan? Here are some basic “must-haves” that the ideal candidate might be expected to provide:
• That you have sufficient assets, financial reserves and personal collateral to endure business fluctuations (and still pay off your loan).
• As an existing business owner, you’ll need to show that you have solid cash flow, sufficient to repay the loan.
• New businesses need to show they have a track record of profitability and success in a similar business endeavor.
