What if Interest Rates Rise?

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Interest RateWith all of the excitement of buying a business, variable rate loans can sometimes add some anxiety. Loan terms vary from bank to bank. Generally, interest rates on a 10-year SBA loan will adjust quarterly as a function of the prime interest rate — typically prime + 1.75-2.25%. Let’s look at an example to understand what impact a rising interest rate might have on your income.

Acquisition Price:$700,000
Discretionary Earnings:$231,000
Buyer Down Payment:$175,000
Bank Loan:$525,000
Interest Rate: 5.5%6.5%7.5%
Annual Payments:$68,376$71,532$74,784
Cash Flow to Buyer$162,624$159,468$156,216
$ Difference$3,156$6,408
% Variance-2%-4%

Today’s rates commonly allow for an initial interest rate of 5.5% on an SBA loan.  The table above describes the impact of successive increases to 7.5%.  Under this scenario, amortization costs on a loan of $525,000 could increase by only $6,408 on an annual basis, which would translate to a minimal reduction in income if all else is equal.

Typically a buyer will pursue a business in part because of anticipated growth — perhaps at the rate of 10% per year — then the threat of interest rate increases of this nature won’t be more than a blip on the distant horizon.  To learn more about buying or selling a business, please contact one of our Apex Business Advisors.

Paul Temme
Senior Advisor

Successful Closing Through Probate

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Probate JudgeClosing on a deal through Probate Court? Yuck, and Yes, it was a successful closing. However, the process was extremely difficult on the buyer and the family of the deceased owner who were left with the challenge of the transition.

Since an estate plan had not been developed and the owner died in a sudden tragic accident, the disposition of the business was left up to a spouse (who was unfamiliar with the business), attorneys, and a probate judge. Are these the best folks to make decisions about your business?

The process has taken over a year just to have the business valued and the buyer approved for the transaction. If you are a business owner you can probably imagine your family being at a complete loss as to how to operate your business if you were suddenly gone.

Think of the details of the business that only you know. Who would they call to fill in the blanks? Your accountant, financial advisor, attorney, or office manager? Are the financial statements up to date every month? Are there secret logins and passwords that need to be passed on? ETC!

Would a business owner willingly put their family through this knowing there are much better options? I doubt it. Fortunately in our recent case the business was able to operate without the owner. In most cases we see, when the owner dies or is incapacitated without a succession plan or a strong management team, the business just shuts down. There are very few buyers clamoring for businesses that are shuttered and unable to operate due to these unfortunate situations.

Talk to an estate attorney and financial planner who can help put a plan in place. Remember, your business is a big part of your estate, so protect it!  We can steer you toward good professionals if you need help. Just call one of our Apex Business Advisors.

Sell or Shut Down or A bird in the hand…

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bird in the handIf there is ever an opportunity to sell a business, the business owner should take a serious look at the options. Every year we will have one or two business owners that refuse to accept a reasonable offer (based on their current situation), and within a few months the owner will just close the doors.

There was a clear advantage to taking tens (or hundreds) of thousands of dollars in a sale.  The owner could have paid off existing debt, had a buyer  take over the lease, kept the business alive, kept people employed, and had a little left in his/her pocket.

Instead, the business shut down with all debt still in place, employees were laid off,  and  the owner has zero money in his/her pocket. Maybe it was pride that got in the way of taking an offer, maybe the owner felt they were being taken advantage of, but whatever the case he/she refused to consider the risks and potential result.

When buyers put offers on the table, it is a serious move and should be analyzed completely. If the business is in a distressed position, it leaves little time for multiple buyers to review the business, assess the risk and hopefully submit offers.

After an offer is accepted, it could still take 30 to 60 days to complete a deal. If you are considering a sale, involve your advisors and have an open and honest discussion about all the options. We usually have a good sense of the buyer market and the attractiveness of any given business.  Contact an Apex Business Advisor if you would like to learn more about buying or selling a business.

Doug Hubler
President