March 7, 2018 Redwood Empire Estate Planning Council HOW TO FUND OWNERSHIP TRANSFERS USING THE SBA Such as a family member, co-owner, or employee David G. Ryan President Upton Financial Group Jeff Clark General Manager and Domain Expert Live Oak Bank
TRANSFERRING THE BUSINESS TO A FAMILY MEMBER
THE MOST COMMON METHODS OF SELLING THE BUSINESS TO A FAMILY MEMBER 1. Self-finance- selling the business on an installment basis 2. Have the non-active family members be shareholders (be equity investors) 3. Self-finance and parents co-sign a note at the bank 3
LOOKING AT A SAMPLE FAMILY ESTATE $4,000,000 estate Lifestyle Assets ($800k) 20% Value of Business ($2.8M) 70% Investment Assets ($400k) 10% 4
LOOKING AT A SAMPLE FAMILY ESTATE OPTION 1 OPTION 2 OPTION 3 OPTION 4 Estate Value Business Self-Finance Shareholders Self Finance and Commercial Bank Loan SBA Company Value 2,800,000 2,800,000 Other Assets (Home, IRA, Stocks) 1,200,000 Estate Value 4,000,000 4 Children 1 Sibling Active in Business 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 280,000 3 Non Active Siblings 3,000,000 1,800,000 4,000,000 2,800,000 Parents/Siblings Carry a Seller Note 1,800,000 680,000 Term 7 years at 6% Interest 26,295/mo 9,933/mo Siblings continue ownership 1,800,000 Bank Note 1,120,000 Term 5 years at 7% Interest 22,177/mo SBA Loan 2,520,000 Term 10 years at 7% Interest 29,259/mo Company Value 2,800,000 2,800,000 2,800,000 2,800,000 5
THE RESULTS OF BEING PROACTIVE The estate becomes more balanced Business 2,800,000 0 Investment Assets 400,000 3,200,000 Life Style Assets 800,000 800,000 Total Estate 4,000,000 4,000,000 This is for discussion, there are taxes, and each business and transaction is unique. 6
ABOUT THE SBA In the Small Business Act of July 30, 1953, Congress created the Small Business Administration, whose function is to "aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns." KEY POINTS Loan value up to $5 million Minimum equity required: 10% 7
MOST COMMON OBSTACLES BY TRANSACTION TYPE Selling to an existing manager or key employee Unable to make down payment Selling to an existing partner/shareholder Unable to agree on value of business Selling to a family member Unable to let go of the business 8
CASH INJECTION Key Consideration Equity injection (down payment) CANNOT be borrowed; If using a HELOC, must show source of outside income for payments; Can be a gift; typically from a direct family member; Can be injection from minority partner (under 20% ownership); IRA rollover or some such acceptable source; Can be from the sale of a house or other personal asset; A portion may come from the seller as a note. 9
VALUATIONS Things to know and ask All transactions need a valuation; What happens if the valuation does not come in at the purchase price? Who picks the valuation expert? Would it make sense to get a valuation first? What time-saving tips do you have? 10
SELLER UNABLE TO LET GO With an SBA loan, the owner must exit the business. The seller may not remain as an officer, director, stockholder or key employee of the business (13 CFR 120.130). If a short transitional period is needed, the small business may contract with the seller as a consultant for a period not to exceed 12 months including any extensions. This rule applies to anyone with equity 11
COMMON MISCONCEPTIONS ABOUT THE SBA MISCONCEPTIONS BY SELLERS: Buyer must be a bad credit risk; It takes too long to get a loan through the SBA; The borrower must be declined by three banks in order to apply for an SBA loan; MISCONCEPTIONS BY BUYERS: Because the SBA guarantees this loan, the lender doesn t care if it s a good deal; The SBA application is over 100 pages; I have too many assets to qualify; 12
IMPROVE YOUR ODDS Have a plan before you start Start early It takes an average of 6-12 months to complete the sale of a business. Know where you are going Construct a road map and have a plan for the journey 13
FOR MORE INFORMATION Jeff Clark General Manager and Domain Expert Live Oak Bank jeff.clark@liveoakbank.com Phone: (707) 331-9098 www.liveoakbank.com 100 B Street, Suite 100 Santa Rosa, CA 95401 Download or order your free copy at: www.sbaloansuccess.com or at www.uptonco.com David G. Ryan President Upton Financial Group dryan@uptonco.com Phone: (707) 546-7860 www.uptonco.com 131-A Stony Circle, Suite 500 Santa Rosa, CA 95401 14
Jeffrey H. Clark Industry Expert, Live Oak Bank Wine & Craft Beverage Jeff has over 25 years of experience banking the wine, craft beverage and business community Founder of the Live Oak Bank Wine & Craft Beverage Group Began his career at Napa Valley Bank in St Helena Frequent speaker to industry groups including Unified Wine & Grape Symposium, Wine Industry Symposium Group, American Craft Spirits Association, American Distillers Institute, US Bev X, and Cidercon. Guest speaker to the Sonoma State University Wine MBA program, the College of Charleston Wine program and the UC Davis Brewing Extension Program. 15
David G. Ryan President, Upton Financial Group, Inc. David has over 25 years of experience in business sales. David founded Upton in 1998. Nationally recognized as an industry leader; David Received is CPA certificate in 1986; Chair of the M&A Source in 1998; Recipient the of the M&A Source Fellow Award; Recipient of the Darrel Fouts Award in 2015; Frequent panelist and instructor at association events; Currently serves on the Market Pulse Report committee, a group which publishes a quarterly survey conducted with the support of Pepperdine Private Capital Markets Project and Pepperdine University s Graziadio School of Business and Management. 16