Urgently Wanted Aviation/Entrepreneur

[nyoung]

If it was me in your situation, I would not fire sell anything. In fact, as long as the Iowa operation was in the black, I would try to keep it open until a really good offer is received.

Being that you are both pilots and own an airplane... this is a lot more realistic proposition than for the average person. Flightplanner says it is 873nm from KIOW to KRAS. Do-able in the Pathfinder... even easier in a faster plane.

 

[Jay Honeck]

In order to get an SBA 7A loan, it means you can't qualify for conventional financing...and the taxpayers are guaranteeing your loan...

But if you got 5% on a 7A for 20 years, good for you. They're usually NY prime +2.75, which is closer to 6% right now.

Actually, the way its done is as a "blend". For Harbor Inn a portion of the loan will be SBA, locked in at 5% for 20 years. The other portion will be financed through a local Texas bank. It's essentially two loans under one umbrella, all done under the auspices of the bank. (SBA doesn't actually do anything -- they just look over their paperwork and give it a stamp of approval -- or not.)

Currently the Texas bank's interest rate is actually LOWER than SBA's 5%, but that's variable. We aim to pay that off within the first year, hopefully before the inflationary spiral kicks in.

 

[Jay Honeck]

Something that needs to be considered is the amount of owner participation necessary to realize that ROI.

Can a non-participating owner invest $275K and expect a 10% ROI? That would imply that a professional management is being paid for before net profits.

So, for $275K, is someone really investing, or are they buying themselves a job?

Also, some unsolicited advice. My employer (I gave up self employment seven years ago) is semi-retired. He has houses in Florida and on the New Jersey shore. He comes here (Massachusetts) three days each month just to keep an eye on things. In the seven years I've been here, he missed one visit. I suggest you do the same thing.

I honestly don't know if a non-participating owner will see a 10% ROI. This is one reason why it's for sale -- because I don't know how well "remote control" operation will work.

Even with an outstanding staff such as ours, there are a hundred little things that Mary and I do every day. Will managers -- even outstanding ones -- show the same level of committment as owners? I find that doubtful, but I'm hoping to be surprised.

As for popping in from time to time, our son will still be here in Iowa City, attending the University of Iowa. We'll be in Iowa City regularly, once we get a staff established in Port A.

 

[Jay Honeck]

If it was me in your situation, I would not fire sell anything. In fact, as long as the Iowa operation was in the black, I would try to keep it open until a really good offer is received.

Being that you are both pilots and own an airplane... this is a lot more realistic proposition than for the average person. Flightplanner says it is 873nm from KIOW to KRAS. Do-able in the Pathfinder... even easier in a faster plane.

Yeah, we're not selling anything quickly, now. It took a few days of meetings with staff, and some Zen meditation exercises to slow my heart rate, but that's where we're at now.

Atlas trues out at 140 knots. It's actually a pretty easy flight from here to Port A, with one stop (usually) in Ft. Smith, Arkansas for gas and lunch.

I suspect I'll be doing that trip a lot more often in the coming year...

 

[Trapper John]

SBA doesn't actually do anything -- they just look over their paperwork and give it a stamp of approval -- or not.)

What the SBA does is guarantee the loan. That's why the banks like to write 'em. Kind of like the banking version of being a Section 8 landlord. Plus the bank gets a freebie in the form of 0.25% of the loan amount, since they get to keep that chunk of the guarantee fee.


Trapper John

 

[Diana]

Atlas trues out at 140 knots. It's actually a pretty easy flight from here to Port A, with one stop (usually) in Ft. Smith, Arkansas for gas and lunch.

I suspect I'll be doing that trip a lot more often in the coming year...

Jay, our farm in Missouri is only a few miles off your route. If you ever need to stop in this area of Southwest MO, you are welcome to stay here at the farm. We have an apartment in the hangar and a guest room in the farmhouse.

 

[wabower]

The key number the buyer must consider is EBIT-DA. In simple terms that's the money available to the buyer eachyear after all other expenses are paid. To attract a knowledgeable buyer, the multiple must be competitive with the going rate. 6X has been the starting point for many years, with larger businesses bringing a higher multiple. Strategic buyers (in similar or related businesses) are typically better prospects for small businesses because they can consolidate some of the costs and achieve better profitability than can financial buyers. Without seeing the financials, pro-forma's and tax returns, it's impossible to know if $275k is a hell of a deal or not. If the business only grosses $450k/yr and won't net 27k after paying the management, it's hard to make the numbers work on the cocktail napkin.

A business with less than .5MM gross revenues is tiny, and too small for most lenders. Even if lendersl consider the package, they will normally only loan on hard assets and then at conservative loan-to-value ratios using orderly liquidation values for the assets. Any "going-concern" or "blue sky" value must be provided through seller financing, so like it or not most sellers can't walk away from their former businesses after the deal closes.

If the Iowa assets are mostly a leasehold and personal property, it's going to be tough to finance. OTOH, the novelty and expense of commuting 1,800 miles on a frequent basis will get old real quick. If it were me, I'd be looking to make whatever deal I could to be damn sure I never had to go back to Iowa for anything other than parents weekend and homecoming.

On a small purchase (like the Alexis Park Inn business), cash is still king. $275K is chicken feed for a business that grosses $450K+ annually, and the return on investment far exceeds anything you can get in the market today.

However, on a larger purchase (where land is involved, as in our purchase of the Harbor Inn), the current interest rates make borrowing money advantageous. This is one reason we made the buy down on Mustang Island. Right now obtaining business financing is EXTREMELY difficult -- but if you DO qualify, as we did, it is possible to obtain a loan in the sub-5% range.

In historical terms, that is essentially "free" money, making it wise to use the bank's (rather than your) money. If you believe (as I do) that we will soon be entering a nasty period of inflation, locking in a 20-year SBA loan at 5% is a good thing to do.

IMHO, of course.

 

[Jay Honeck]

What the SBA does is guarantee the loan. That's why the banks like to write 'em. Kind of like the banking version of being a Section 8 landlord. Plus the bank gets a freebie in the form of 0.25% of the loan amount, since they get to keep that chunk of the guarantee fee.

Trapper John

Better yet, if the bank hurries the paperwork through (Not likely; SBA moves at a glacial, almost undetectable pace. We started this process in December of last year, and they tell me that final SBA approval may not happen for another month or TWO, even though we are 100% approved by the bank!), right now there are ObamaBux available "allowing" SBA to "waive their fees". This amounts to about $5 AMUs, which ain't anything to sneeze at.

What SBA does to merit earning $5K in "fees" on this loan is a real mystery to me, since it seems like the bank does all the grunt work. SBA looks over their work, and either approves or denies.

A few months ago Obama was railing against the banks for "not lending" or using the stimulus funds to "get business going again". Now that I've seen the process from the inside, I have to say that it isn't the banks that are to blame. The government simply moves very, very slowly, and has put up all sorts of new hurdles to borrowing that makes business expansion difficult at best.

It's funny -- three years ago, you could get a loan in a few weeks, with bad credit and no money down. Now, the government pendulum has swung far to the other extreme, making it extremely difficult to obtain financing even with a gold-plated credit rating. Until that loosens up a tad, the economic recovery will remain weak, IMHO.

 

[Jay Honeck]

Jay, our farm in Missouri is only a few miles off your route. If you ever need to stop in this area of Southwest MO, you are welcome to stay here at the farm. We have an apartment in the hangar and a guest room in the farmhouse.

Thanks, Diana!

 

[Trapper John]

What SBA does to merit earning $5K in "fees" on this loan is a real mystery to me, since it seems like the bank does all the grunt work. SBA looks over their work, and either approves or denies.

It's because we the taxpayers are guaranteeing your loan via the SBA. You pay a 2%-3% guarantee fee - it's like an insurance premium. The 2%-3% goes in the pot to help cover loans that go bad.

You really should offer all of us a "U.S. Taxpayer Discount" since we all effectively have a piece of your business. But, you can't, since one of the one the forms you'll have to sign is a certification of non-discrimination...

A few months ago Obama was railing against the banks for "not lending" or using the stimulus funds to "get business going again". Now that I've seen the process from the inside, I have to say that it isn't the banks that are to blame. The government simply moves very, very slowly, and has put up all sorts of new hurdles to borrowing that makes business expansion difficult at best.

If you weren't getting an SBA loan and were going through a regular bank, they'd want at least 40% owner equity in the deal. Don't like the government's speed, don't get their guarantee, and see what happens.

It's funny -- three years ago, you could get a loan in a few weeks, with bad credit and no money down. Now, the government pendulum has swung far to the other extreme, making it extremely difficult to obtain financing even with a gold-plated credit rating. Until that loosens up a tad, the economic recovery will remain weak, IMHO.

It's the banks tightening their underwriting standards, not the government. Doesn't matter how good you think your credit rating is, the banks want you to have lots of skin in the game before they'll play now. It's what happens after they get sloppy, things start to go south and they realize their exposure after making a bunch of 10% equity deals on strip malls.


Trapper John

 

[Jay Honeck]

If you weren't getting an SBA loan and were going through a regular bank, they'd want at least 40% owner equity in the deal. Don't like the government's speed, don't get their guarantee, and see what happens.

You've got that a bit backwards. We went for (and achieved) bank approval entirely separately from the SBA portion of the loan. Even if SBA denies our application (which would be extremely unlikely, given their limited risk), we are still approved for 100% of the loan by our bank.

We did this quite purposefully, since time was of the essence for the seller. Had we waited for SBA to approve us, the deal would have fallen through.

Actually, the only reason we went for an SBA loan at all was because they offer 5% fixed interest over 20 years. If I'm reading the economic tea leaves correctly, that 5% fixed will seem like a gift from heaven in three years...

It's the banks tightening their underwriting standards, not the government. Doesn't matter how good you think your credit rating is, the banks want you to have lots of skin in the game before they'll play now. It's what happens after they get sloppy, things start to go south and they realize their exposure after making a bunch of 10% equity deals on strip malls.

See the procedure we followed, above. The bank -- while certainly not fleet of foot by any measure -- was positively nimble when compared with SBA.

The banks tightening their underwriting standards has been generally a good thing, since up through 2008 their standards were generally too lax. However, this tightening of standards slows the pace of borrowing overall -- and, thus, of business -- quite measurably. That's just one factor in our stubbornly slow economic recovery.

 

[ScottM]

Actually, the way its done is as a "blend". For Harbor Inn a portion of the loan will be SBA, locked in at 5% for 20 years. The other portion will be financed through a local Texas bank. It's essentially two loans under one umbrella, all done under the auspices of the bank. (SBA doesn't actually do anything -- they just look over their paperwork and give it a stamp of approval -- or not.)

Currently the Texas bank's interest rate is actually LOWER than SBA's 5%, but that's variable. We aim to pay that off within the first year, hopefully before the inflationary spiral kicks in.

You've got that a bit backwards. We went for (and achieved) bank approval entirely separately from the SBA portion of the loan. Even if SBA denies our application (which would be extremely unlikely, given their limited risk), we are still approved for 100% of the loan by our bank.

We did this quite purposefully, since time was of the essence for the seller. Had we waited for SBA to approve us, the deal would have fallen through.

Actually, the only reason we went for an SBA loan at all was because they offer 5% fixed interest over 20 years. If I'm reading the economic tea leaves correctly, that 5% fixed will seem like a gift from heaven in three years...

I am confused. Why would you care what the interest rate is in three years when you plan to pay off the loan in one year and the bank's rate is lower than the SBA's rate?

 

[Jay Honeck]

I am confused. Why would you care what the interest rate is in three years when you plan to pay off the loan in one year and the bank's rate is lower than the SBA's rate?

As I've stated, there will be essentially two loans -- one with the bank (no SBA involvement), the other guaranteed at 5% interest by the SBA. We plan to pay off the bank's portion of our loan as quickly as possible, to avoid the escalation of rate that they will enforce as inflation kicks in.

We would never pre-pay the fixed-rate 5% SBA loan, because (again, IMHO) in three years that will seem like an interest PAYING investment, when compared to the actual inflation rate.

I could be wrong, but given the enormity of the national debt, inflating our way out of its seems the only viable road to take.

 

[Trapper John]

You've got that a bit backwards. We went for (and achieved) bank approval entirely separately from the SBA portion of the loan. Even if SBA denies our application (which would be extremely unlikely, given their limited risk), we are still approved for 100% of the loan by our bank.

We did this quite purposefully, since time was of the essence for the seller. Had we waited for SBA to approve us, the deal would have fallen through.

Then someone's doing something fishy...

SBA-guaranteed loans may not be made to a small business if the borrower has access to other financing on reasonable terms.

http://www.sba.gov/financialassistance/borrowers/role/index.html

Trapper John

 

[AdamZ]

Jay, I was going to post what Henning said above. I agree that there is no better incentive to do it right than through ownership. If perhaps you or your wife can work a deal with the current managers or employees where in you sell the Iowa location and you stay on as an employee for say 3-5 months and agree to be available for X number of hours per quater for one year after that to advise and consult that may give them the net and experience that they need. We've experienced this with a few clients who have sold or bought their businesses. I'm keeping my fingers crossed for you.

 

[el con]

Solution, own both, leave the wife in Iowa to run Alexis, she knows the whole thing inside and out, has friends locally. You run the Amelia, just tell her it's way too dangerous as hurricane season is coming up, it's way too hot , and salt water smells like dead fish. I'm sure she'll understand.
Also , I see you have two planes, one for each location, is she a pilot?
Seriously, good luck, I'll be on my way this Brownsville ,looking for a warehouse, maybe we will come up sometime and see the new place,sounds nice.

 

[Tom-D]

Hire a manager and run both......... don't ya just love tire kickers.

 

[Jay Honeck]

Then someone's doing something fishy...

SBA-guaranteed loans may not be made to a small business if the borrower has access to other financing on reasonable terms.

http://www.sba.gov/financialassistance/borrowers/role/index.html

Trapper John

Doubtful, since my banker lady has been working closely with the SBA lady on this deal.

On the other hand, since approval I have had virtually no input into the process, so for all I know I'm borrowing money from the Mexican Mafia. When you're doing stuff like this from 1200 miles away, by fax and email, your level of input is surprisingly limited.

In the end, I will sign on the dotted line and pay...someone. At this stage I don't really care who, quite frankly.

Right now we're headed out the door for "The Big Convoy" to Mustang Island. We're pre-positioning a motor home, a Mustang, a Toyota, a Lexus, and two motorcycles to Port A over the next week. It takes two days to get there, we'll spend a few days in meetings, and then fly back.

 

[Jay Honeck]

Hire a manager and run both......... don't ya just love tire kickers.

Did just that yesterday. My night manager is now General Manager of the Alexis Park Inn & Suites. I think she'll do a wonderful job.

I also hired a new night manager, and a new housekeeping supervisor. All from existing staff, thankfully. All really good people.

Now we've got to somehow fill the 80 hours Mary and I worked each week. That's gonna be a harder nut to crack.

 

[Jay Honeck]

Solution, own both, leave the wife in Iowa to run Alexis, she knows the whole thing inside and out, has friends locally. You run the Amelia, just tell her it's way too dangerous as hurricane season is coming up, it's way too hot , and salt water smells like dead fish. I'm sure she'll understand.
Also , I see you have two planes, one for each location, is she a pilot?
Seriously, good luck, I'll be on my way this Brownsville ,looking for a warehouse, maybe we will come up sometime and see the new place,sounds nice.

Haw! You're trying to get me divorced, no?

Unfortunately, the ONLY staff we'll have in Port A is...each other. The seller owns several properties on the island, and has made it clear that she's taking the staff with her.

So, for the first week or two, it'll be just Mary and me running the place, 24/7.