How to Buy a Business Under $1 Million Dollars

1. How to Buy a Business Under$1 Million Dollars

2. What Should You Look For? Education Experience Professionalism References

3. Speaker Panel • Moderator - Jim Forrest Affiliated Financing Services, Ltd. • Broker - Todd Cushing, EBIT Associates, Ltd. • Banker - Mary Los, Fifth Third Bank • Attorney - Markus May, Johnson Westra Broecker Whittaker & Newitt, P.C.

4. Today’s Topics • How to buy a business under < $1MM • What buyer's can expect • Tools to have from the prospective of broker, lender and legal advisors • How a < $1MM deal differs from larger deals

5. What Buyers Look For • Cash flow (EBITDA) + OC or SDCF • ROI • Diverse customer base • Growth potential • Transition (by seller for 1– 6 months) • Flexible terms • Living wage

6. Steps to Buying a Business Close!

7. Separate the Buyer from the"Tire Kickers" • Industry statistics (first time buyers) • 100 lookers - 5 become buyers • 3 out of 5 bought companies that were not targeted profiles • 6-18 month timeline • 95% of LOI's (Letter of Intent) failed

8. "Leap of Faith" The real key to being a serious buyer, however, is whether you can make that "leap of faith" necessary to purchase a business. There are no "sure things" and there are no guarantees - if the buyer can't make the jump, no sense going any further. Unfortunately for the seller, this is usually discovered at the earnest money deposit or during the due diligence stage. Faith may be defined briefly as an illogical belief in the occurrence of the improbable. H.L. Mencken

9. TOP 6 Questions to Ask to Determine if the Prospective Buyer is for “REAL” • 6. Are you currently employed or unemployed? • I'm currently employed. • I'm currently unemployed and will pull out equity in my home for down payment. • 5. Who besides yourself will be involved in the decision? • My investors • My spouse said the business has to have • proprietary products.

10. TOP 6 Questions to Ask to Determine if theProspective Buyer is for “REAL” • 4. Are there any past or current bankruptcy/tax issues? • YES, but I'm going to put the business under my father's name! • Business will need a lot of seller financing. • 3. How long have you been searching for a • business? • Call me when you have a "good deal" • I have been looking for years!

11. TOP 6 Questions to Ask to Determineif the Prospective Buyer is for “REAL” • 2. Have you made any offers to purchase a • business? • Started looking a week ago • I have submitted 5 Letter of Intents and all have fallen apart! • 1. Do you have a current financial statement • available on yourself? • I only give my financial statements to • principals • Here is the name and phone number of my banker!

12. How a < $1MM Deal Differs from Larger Deals • Most brokers have experience in small deals • How a broker, intermediary, investment banker differ • Time commitments usually is the same in small deals and lower middle market deals • Usually a lower risk in lower middle market, cash flow, management team in place, etc. • Buyer may have less qualified team in place, and may be trying to save a "buck"

13. Types of Financing • 100% Seller Financing • 100% Cash Buyer • Bank Financing: • Typically includes a seller note • Bank prepares a business valuation and financial analysis including verification of seller tax returns

14. Advantages to SBA Lending • Provides long term capital for small businesses • Working capital, F&F, inventory 7 years • Business acquisitions, M&E 10 years • Real estate purchase 25 years • No prepayment penalty if the loan is less than 15 years • Provides financing to businesses with collateral shortfall • Requires low down payment • No balloon clauses • No banking covenants

15. Use of SBA ProceedsFor Business Acquisitions Provide working capital (including transaction costs, SBA fee, attorney fees, accountant fees, broker fees, etc. • Purchase machinery, equipment, furniture and fixtures • Refinance existing business debt (under certain scenarios) • Expand or renovate facilities • Purchase or construct commercial real estate

16. What Attributes should your Business have? The SBA considers the following: • Good character • Management expertise and commitment to succeed • Reasonable personal contribution or business equity • Start up businesses: 30% • Business Acquisitions: 20% • Real Estate Purchases: 10% • Feasible business plan • Sufficient collateral • Ability to repay loan from projected operating cash flow

17. Sample Business Acquisition Structure Purchase Price $775,000 Working Capital $25,000 TOTAL PROJECT COST $800,000 Less 20% down payment $160,000 Less 10% seller note $77,500 Loan Amount $562,500 • Working capital can also be financed via a line of credit using A/R as collateral • Based on an interest rate of P+2.00%, or 10.25%, and a 10 year amortization, annual loan payments are $89,375 • Typically 3 months of interest only payments are included in loan structure

18. Sample Cash Flow Analysis Net Profit $75,000 (Line 21 of S corp. tax return) Less: Estimated income taxes: 12,000 Plus: Depreciation: 45,000 (Line 14 of S corp. tax return) Plus: Interest: 34,000 (Line 13 of S corp. tax return) TOTAL CASH AVAILABLE: $142,000 Debt coverage ratio: $142,000/$89,375 = 1.59 • Minimum debt coverage ratio of 1.20x is required

19. Financing a Successful Business When to apply: • Don’t wait until the last minute: begin the prequalification process with the bank prior to identifying a business, if possible • Remember that a $500,000 transaction requires the same lender due diligence as a $2,000,000 transaction • How to prepare before meeting with your lender: • Pull a credit report • Have a business plan • Know & understand your financial needs

20. Continued . . . • Assemble your team!! Surround yourself with good business brokers, accountants, attorneys, lenders and insurance agents • Know your market and vendors • Diversify - avoid concentrations • Research your projections • Request adequate funding • References: SBA, SCORE, SBDC, RMA www.sba.gov www.rmahq.org www.annualcreditreport.com

21. How a < $1MM Deal Differs from Larger Deals • Transaction can move slower as the buyer may be less experienced or familiar with financing • Team may not have transactional experience (ie, using a family friend) • Bank underwriting may be different (credit scoring vs full analysis) but SBA requirements are the same

22. Legal Perspective • Overview of a business purchase

23. Legal Perspective • A Main Street business purchase encompasses the same issues as the purchase of a more expensive business • Work closely with the broker, banker, and accountant to get the deal done • Create an entity to purchase the business • Broker agreement • Letter of intent and due diligence • Purchase agreement and ancillary documents

24. Legal Perspective • Seller’s Legal Representation • Usually represented by an attorney • An attorney cannot ethically represent both sides of the deal • Brokers cannot provide legal advice, but may have form contracts they provide

25. Legal Perspective • Due Diligence • The process of making sure you are buying what you think you are buying • Generally falls in three areas: • Legal Due Diligence • Financial Due Diligence • Operational Due Diligence

26. Legal Perspective • Purchase Agreement Common Items • What is being purchased (stock, assets, liabilities?) • Purchase price (seller financing?) • Seller Training/Consulting • Lease issues • Covenants not to compete • Lien search and Bulk Sale protections • Condition of business through closing

27. Legal Perspective • Purchase Agreement Common Items cont. • Conditions to purchase (financing, lease, etc.) • Representations and warranties • Indemnification clause • Security agreements, promissory notes, guaranty agreement, etc. for seller financing

28. Legal Perspective • Closing Process • Sign purchase agreement if not already signed • Sign ancillary documents • Non-compete, Consulting Agreement, Seller Financing, Lease Assignment, etc. • Sign documents transferring ownership • Bill of Sale and Assignment • Get the keys and shake hands

29. Legal Perspective • How a < $1MM Deal Differs from Larger Deals

30. Legal Perspective • Buyer Profile • Often a first time business purchase • The purchaser may be less familiar with the sale process and the value an attorney provides. May want to limit legal fees and at the same time get full legal protection • Often not much experience in dealing with attorneys

31. Legal Perspective • Seller’s Legal Representation • Often attorneys who are not experienced in mergers and acquisitions and who do it as an adjunct to their regular practice • Some attorneys may work on a "flat fee" basis and will do as little work as possible in order to maximize profit • Some Sellers do not hire an attorney

32. Legal Perspective • Seller’s Legal Representation cont. • If Seller is unrepresented or represented by an inexperienced attorney, opportunities exist to recoup legal fees or other great benefits • Purchase price allocation (Fair Market Value) • Nonexistent indemnification limits • Deal structure • Many others

33. Legal Perspective • Due Diligence • Some buyers decide to not do much due diligence, e.g. franchises • Often much of the due diligence is performed by the buyer • Buyers and their advisors need to be on the same page as to who is doing what • Checklists are critical

34. Legal Perspective • Purchase Agreement • Often start with a simpler agreement • May be signed at closing • If Seller is not well represented, can often use a very pro buyer agreement and get almost all the legal things you desire

35. QUESTIONS?

36. Todd Cushing - BIO • EBIT Associates is a leading business brokerage and intermediary firm advising private and corporate clients on lower middle market transactions. EBIT provides sophisticated solutions in merger and acquisitions, private placement, financial restructuring, and valuation opinions. EBIT Associates is a registered Illinois broker and CBI member of IBBA. Todd Cushing is an experienced professional who was part of a family owned company for 22 years with an EBITDA over $1.1 Million before the company was sold a decade ago. With EBIT, you will be working with experienced professionals who have first hand knowledge of the details and emotions involved in selling or buying a company.

37. Mary Los - BIO • Mary Los, Fifth Third Bank – Los is the Vice President and SBA Manager of Fifth Third Bank, one of the largest banks in Illinois with more than 150 banking centers.. She has worked with the SBA program for 14 years and currently manages the SBA teams in Illinois, Indiana and Tennessee. Los earned her undergraduate degree in Criminal Law and her MBA in finance from DePaul University.

38. Markus May - BIO • Markus May is a client focused business attorney with knowledge in a broad range of industries. He represents business clients as well as clients who desire to start businesses or buy and sell businesses. He advises clients on how to avoid disputes and litigation and how to structure contracts and leases to minimize risk and maximize future benefits. Markus speaks frequently at seminars on buying and selling businesses and has been a guest speaker on Chicago radio. • Markus currently serves as a member of the Corporations, Securities & Business Law Section Council of the Illinois State Bar Association, as well as the Business Law Committee and Publications Board of the DuPage County Bar Association. He is a member of the Midwest Business Brokers and Intermediaries and was a recipient of their 2006 and 2007 Collaboration Awards. He has written articles related to mergers and acquisitions including recent articles on pre-acquisition agreements and protecting business owners from personal liability. He received a Bachelors degree in Marketing and a Juris Doctorate degree from the University of Colorado where he served on the Law Review and was class president. • Markus can be contacted at themayteam@hotmail.com, mm@jwbwn.com, or 630-665-9600.