As a small business owner contemplates the shift from leasing to owning, and thereby takes the initial steps to build wealth outside of his or her business, the question of how much building can be purchased comes up. In the previous article on this subject ("Create Wealth Outside Of Your Small Business, Part 1“), I covered the most extensively used financing options: The Small Business Administration’s “7a" and “504" programs.
There are other ways to finance that building purchase, although perhaps not as effective. To completely cover the topic, I would like to briefly describe a couple of other options: “Conventional" commercial and small business real estate financing.
Conventional Commercial Real Estate Loans
This is what would be considered “traditional" commercial real estate financing and offers a small business owner perhaps the best interest rates available (although I will make the case in a later article that “rate" is one of the least important aspects in this type of lending).
This type of commercial real estate loan looks at the property as if it was purely an investment. The property is treated as the sole source of repayment for the debt and the potential income of the building for that repayment is “marked to the market." This means that comparable lease rates are used to determine how much money is available to service any debt used to acquire the property. The minimum down payment is usually around 25% of the purchase price, assuming there is sufficient cash flow to service that size of a loan. Lenders prefer multipurpose properties and make loan reductions on properties that are for special purposes (automotive, hospitality, etc.).
Another aspect of these types of loans is that they rarely “fully amortize" and usually call for repayment (“balloon") after 10 years. But, since they typically have a 25 year amortization and carry pretty hefty prepayment penalties, the owner is usually stuck with a refinance of approximately 80% of the original balance after making 10 years of payments!
So from a small business owner’s perspective, this is not the best way to build wealth using the business. The large down payment is a significant drain on the business’ working capital and the inability to pay off the loan quickly makes the loan option almost indistinguishable from leasing.
Conventional Small Business Real Estate Loans
The private sector is constantly coming up with new ways to provide solutions to the small business person. This method of financing blends some of the positive aspects of SBA and Conventional financing. The business owner can still get up to 90% financing on the purchase price of a facility, occupancy requirements are usually lower than SBA financing (sometimes down to 25% of the facility), and in some situations there are even “Stated Income" programs available, reducing the paperwork burden on the borrower. Finally, they are usually structured as a single loan, unlike the SBA 504 program, which is a combination of two loans.
The down sides to these programs are that they usually carry a higher rate and do not cover as many property types as the SBA 504 program. Also, the stated income versions frequently have reduced loan amount maximums or lower loan-to-value targets.
So while the programs are not perfect, they fill the gaps between the Small Business Administration offerings and traditional commercial financing. In the next article, we will cover strategies for using your small business to build wealth outside of the business operation itself.
Creating a small business from nothing is easy to do anyone can do it, by simply filling out a few forms at a government office and then you have your small business. Making it successful is the hard part but also knowing how to get out of your business is as important to your business as owning it. Way to many people startup small businesses but then have no idea how they are going to exit it and in the end the way they build their business in many many cases results in them not getting the windfall they had hoped for.
Let me be really honest with you, if you build your business correctly and make it successful, you can make millions, but you can cost yourself money in not knowing how you will dispose of it and building it in away in which selling is not easy.
Now, I hear it now, but are not all businesses built the same way?
Well in fact no and if you structure your business in the wrong way, it can affect your ability to offload your business.
So what are the ways business owners can exit their business?
Let me list them straight off -
1. Sell to another small business owner 2. Sell off Franchises and Areas to Master Franchisors 3. Sell your business to an Equity Group 4. Sell Shares in your company to other people 5. Publicly List Your Company Shares
The first secret to building a Successful Small Business is to know how your business will look when you are finished. Now based on what your vision of your business is will depend on which of the 5 options you will take.
For example, my team and I are developing a new business that we have decided in three years will be publicly listed. The way in which we are designing this business is very different to how we are growing and building our other businesses. For example, our car cleaning business has been designed specifically to be franchised which has meant we have essentially built each area as its own small business that is profitable for a single operator and will bring them in a good weekly wage and small profit on their investment.
In designing our publicly listed company we have to treat it in a different way so that it is designed to meet the needs of serious investors like institutional buyers. Now by know way am I saying I am an expert in this area but some companies are more suited for public listing than others.
For example if you are building your company for a listing on any of the worlds stock exchanges, investors are looking at three core areas -
1. Good Solid Business Growth (double digit growth) 2. Solid growing profits (double digit profit growth) 3. High Potential for Share Value Growth
If your business does not have those elements then you could be punished in a big way on the stock market with a low share price and in many cases you can loose more money than you make. A few years ago I bought into a small diamond mining company because of this one reason. The share price of the company had been savaged by the bigger players and in those players driving the share price to on 1 cents a share, simply because its potential for high share value growth and profit return per share was simply not there. What happened in the end was that the Publicly Listed Company was bought out by an equity group and was changed to a privately owned company. I actually bought the shares for less than 1 cent a share and the cool part for me was that I made a couple of 100% profit on those shares, but those people who invested when the company was publicly listed lost a large amount of their investment. This really drove home to me that you need to be careful about what you do when you want to get out of the business. In this case, publicly listing the private company cost the owners and shareholders more, than if they had of stayed private.
In the end the company which had an initial listing of 10 million dollars sold for a couple of million dollars. The original shareholders lost an investment of over 8 million dollars. The owners would have been better off keeping the company private and selling it to another mining company or a publicly list company. The reason I know this to be true is because the private equity group did that just 18 months later and I know they doubled their money.
On the other end of the scale, do not just sell your business to anyone. When you build a small business, one of the things that will happen is that you will build a very close relationship with your clients and many of them will become friends. Make sure that when you decide to exit the business, that you talk to your existing customers prior to exiting because getting the wrong person into your business can hurt them as well, both financially and personally.
There is no right or wrong answer to what you should do when it comes to exiting out of your business, but always have a clear strategy on how you are going to exit and build your business towards that exit strategy. If you are partnering with someone else to build your business, make sure that when you create your partnership agreement that you both have a clear understanding of how and when you are going to exit the business.
I have seen so many small businesses destroyed by partnerships that are fine for the first couple of years but then the partners fall out and because one partner wants to exit now, it puts such a clear strain on the business that the business collapses.
One of the clear things I have learned about business is that you must have a vision of what you want for your business and work back from that vision and develop your timeline for success.
Both Craig Higdon & Chris Le Roy are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Craig Higdon has sinced written about articles on various topics from Finances, Debts Loans and Jewelry. WANT TO USE THIS ARTICLE IN YOUR E-ZINE OR WEB SITE? You can, as long as you include this complete statement with it: ‘ “The Investment Property Insider" is published by Craig S. Higdon, a veteran commercial mortgage broker. He publishes the weekly e-zine. Craig Higdon's top article generates over 8100 views. to your Favourites.
Chris Le Roy has sinced written about articles on various topics from Travel and Leisure, Asthma and Asthma. Would you like to learn more on developing your own Small or how to implement the Thirteen Secret Steps all millionaires know in the path to becoming an obscenely wealth and successful person. Then find out how with a copy of our. Chris Le Roy's top article generates over 40500 views. to your Favourites.