The Initial Questions have only one goal. Determine whether a company is interesting to you or a waste of your time as quickly as possible. While the questions won’t be exactly the same for everyone, the following should cover most if not all of your first look.

1. Location
2. Annual Revenue
3. Annual Cash Flow. Specifically, EBITDA and EBITDAR. It is important to closely define “cash flow” as many people have very loose definitions for this term. A misunderstanding here can cost you time and money.
4. Current appraised value of any real estate included in the deal.
5. The original cost or current market value of any furniture, fixtures and equipment (FF&E) included in the transaction.
6. The market value of the business component and how that market value was determined.
7. The total asking price.
8. Whether the company is properly licensed and in good standing with regulators.

You’ll certainly have other questions, but these first few can save you time, energy and money when you’re trying to identify the right candidate.

All the best,

Brad Barnett
President, BFS^®
Don’t settle for less than a proven early education company—Talk with BFS^® for the Expertise and Individual Attention you deserve.

The post What Are the Initial Questions I Should Ask About an Early Education Company If I’m Interested in Buying It?  appeared first on BFS®.

Many of us need money from other people to start and grow companies. The money comes from banks, partners, investors, venture capitalists, equity funds…and/or our closest friends and family. No matter what the source is, understand two things. One, there is always a cost to using someone else’s money. Two, the cost can vary greatly between sources.

The first question is…Do I borrow money and go into debt or do I sell equity in my company to someone else? Keep in mind that equity is always more expensive than debt. You only have to pay-off debt one time. The payments on equity can last the entire life of your company. I have seen more than one person sell his or her company only to realize just how expensive equity can be. One example, my friend (a very smart guy) started his company and gave away a 20% equity stake in exchange for $50,000 of start-up capital. Over approximately 10 years, this 20% partner received 20% of all of the company profits and $5,200,000 when the company was sold. If he paid interest of 50% a year on the $50,000, his total repayment would have been $300,000.

When it comes to growing a successful early education company, responsible use of debt can be great tool to expedite that growth. Here are some important things to consider when you’re thinking about using debt:

1. Never accept a loan from any lender (including your favorite lender) without having many lenders compete for your loan. No matter how you approach the process, competition amongst vendors is always in the best interest of the consumer.
2. When you see the loan that you think is right for you, do a detailed review (this means use a good attorney) to make sure there are no hidden fees or terms…no ambiguous language that can surprise you after you have already made the commitment. Some people think it’s overkill, but it’s not. Many banks and bankers (like car salesman) take an approach that the paperwork is all just standard stuff…sign here …sign here. It’s standard stuff because they’re not the ones on hook. Review the loan documents carefully.
3. Be transparent with your lender. There’s nothing wrong with negotiating the best terms you can get, but don’t hide anything. Be honest and be direct.
4. If you can, see how the lender works with their borrowers when things aren’t going well. Everyone is friendly the day you sign the papers, but I have seen lenders become absolutely vicious when they’re getting tested. Never in recent history was that more apparent than in the financial system crash of 2008. You want a lender that will work with you just in case everything doesn’t go as planned.

The post Funding Your Early Education Company appeared first on BFS®.

The answer is….don’t just shop multiple banks, shop them aggressively and meticulously. If you’re not the kind of person that wants to do that type of work, there are people who will do it for you and those people are far less expensive than the quarter-century mistake you can make by accepting the wrong loan.

Here’s where you’ll want to focus:

1. Collateral Requirements—amount, type and time to release.

• Amount—Banks, as they should, are always looking to have the most collateral they can secure. Many banks will simply ask for every major asset you have when they could approve your loan with less collateral. Scrutinize these requirements. Don’t let it stand if you think you’re giving up too much.
• Type—Banks like assets that are easily located, like real estate. That way if something goes wrong, they know exactly where to find it. Less attractive to banks are assets that are easily moved, like a car or gold coins. If you need, for example, $100,000 of collateral to secure a loan, don’t tie up a $750,000 piece of property when you could use $100,000 worth of blue chip stock. You now have $650,000 more in useable assets.
• Time To Release–Keep in mind that collateral is negotiable not just in the amount or type of collateral you provide but also in the amount of time the bank holds the collateral. Know that your collateral does not have to stay under the bank’s hold for the duration of the loan. Assets used as loan collateral can be released before you repay the entire loan. Make sure you can breakout your collateral as soon as possible.

2. Interest Rate—This one is obvious, but know that bankers have a tendency to talk in terms of bigger rate moves such as discussing whether the rate will be 6% or 6.25%. Rates can be pinned in smaller increments. Instead of 6.25% or even 6.125%, a loan can be pegged to 6.057% (for example). On a $2,000,000 loan, that’s $1,360 in the first year alone. It may not seem like much when you’re looking at $2,000,000 (bankers know that), but you wouldn’t put it in your paper shredder once a year.

3. Points—Banking is a very competitive business. I can’t remember when or if I have ever paid points on a loan…including the early days when we were young and broke. You should be able to find a bank that doesn’t require points.

4. Pre-Payment Penalties—Depending on the type of loan you choose, starting with Conventional vs. SBA, the norms for this penalty fee are one, three or five years. As rates have been historically low in recent years, we tend not to worry about the refinancing component, but as we are discussing here, lower rates don’t have to be the only reason for refinancing. If you can get better overall terms for a cost that isn’t prohibitive, then it’s time to improve your position. If you’re choosing to pay-off your loan early and simplify your balance sheet, then it’s much better if you can get rid this contingent liability as soon as possible. That means scrutinizing this factor before you accept the loan.

5. Paperwork—Organizing your documents for analysis by the banks’ underwriters is a skill. Bankers want to make good loans. If your loan package is organized so that it fits into the “banker-speak” format, it makes it easier and faster for the bank to say yes. Don’t underestimate the value of speaking the bank’s language fluently. It is a solid indicator that you are organized and savvy in the financing world, and organized and savvy leads to better terms.

6. Credit Score—Everyone would like to have an 800+ credit score, but that’s not the case for most people. Some people have lower credit scores because they choose not to carry debt. There are many reasons for a less-than-perfect score. Unless you have a flawless credit score, be prepared to explain any blemishes on your credit record. Know what the bank sees before they see it. If you need to know more about improving or repairing your credit score, see https://bfsinc.net/high-credit-score-need/

7. Type of Loan—Comparing both conventional loans and SBA loans is another way to improve the odds of getting the best loan for you.

8. Protect Your Credit Score By Shopping Banks The Right Way–Don’t reduce your credit score by shopping banks the wrong way. When you’re ready to shop banks or other lenders, time it so you’re in front of the lenders during the same 30 day window. In the infinite wisdom of credit reporting, your credit score will typically drop about 8 points when you are shopping for financing. That’s bad enough especially when you consider that a loan may very well make you a better credit risk—not worse. To add insult to injury, if you shop lenders over two different 30 day periods, for example March and April, you’ll get hit for 8 points for each month. It’s not a perfect science, but it’s very close. Again, be organized and know the system.

9. Confirm Bank’s Track Record–In an effort to keep their portfolios balanced, banks move into and out of industries. Ask your bank for confirmation that they have made / are making loans to early education companies.

10. Ask for More–Remember that banks are vendors. They are important and necessary vendors in most cases, but they are still vendors…and there are a lot of them. They work in an incredibly competitive environment. Don’t be afraid to ask for more. Sometimes you’ll get it

The post How Can I Get the Best Loan Terms For My Early Education Company? appeared first on BFS®.

In this industry and this era, there really is no choosing the right bank or the right banker over the long-term.  If you want the best odds of getting the best results for you and your business, then choose banks and bankers on a case-by-case basis.  There are a lot of exceptionally good people who work in lending within banks.  However, virtually none of these people make policy decisions.  None of these people unilaterally decide if you get your loan and on what terms.  Banks have loan portfolios to balance and protect.  Banks change the types of loans they make and people and industries they lend to based on the needs of their portfolio and the broader exposures of their bank…and that’s the way it should be.  The banks look out for themselves just as you need to look out for yourself.

While advertising about “relationship” banking is warm and fuzzy, the warm and fuzzy part is usually more for the bank than you.  Advertising executives in nice offices in beautiful skyscrapers work very hard on the warm and fuzzy campaigns, so it’s important for you to make your decisions objectively.

The primary tool for protecting consumer interest has always been a competitive market place.  No one works harder when they don’t have to compete.  Hence, when you’re looking for a bank (or any other vendor), make sure the bank understands that they have competition.

Now, here’s the good news.   Having a long-term banking relationship and making banks compete for your business are not mutually exclusive conditions.  Your bank becomes your bank by winning your business the first time.  That bank continues to be your bank when they continue to outperform their competition.  For example, a bank sells you a home mortgage (“gives you a loan for your house”).  They have the best terms, and that’s great.  They have earned the chance to get the first call when you need a business loan, car loan, credit card…etc.  The minute the bank thinks they earned the “only” call instead of the “first” is when you’ll start losing ground.

A good bank and good banker can prove to be very valuable to you and your early education company, but the bank is not your business partner.  They are a vendor to you.  Concisely, make them complete to ensure your best interests.

I hope this information is helpful to you. Make sure you check out out other blog posts on buying a childcare company or school.

The post Choosing The Right Bank For Your Loan appeared first on BFS®.

You need four basic items to buy a childcare company or school.

1. Your credit score.
2. Your occupational background.
3. Whether or not you’re buying real estate with the business.
4. The type of financing and lender you choose to make the loan.

First, your credit score in this market needs to be 700 or better. In some cases, your score can be in the high 600s as long as there is a good reason for it, but ideally you and any partners need to have scores that will average out around 700 or more.

Second, your occupational background speaks to your strength as an owner or operator. This is certainly important to the bank looking to be repaid, but contrary to some public perception, it is not always necessary to have a background in education. I have seen buyers become wonderfully successful in our industry after careers in non-education sectors.

Third, the SBA changed their lending parameters in January 2018 so buyers can purchase companies (business and real estate) with a 10% down payment. SBA lenders no longer require a 25% down payment for the business component. Assuming you are using an SBA loan, the term of your loan will be a weighted average of the business component term (10 years) and the real estate term (25 years).

Fourth, the bank or lender you choose to make the loan can have a considerable impact on the cost of your loan. Costs include the amount of cash you have to use for a down payment as well as your interest rate, points on your loan, the amount of time it takes the bank to close… etc. The best defense against an overpriced loan is to make the banks compete with each other. Don’t be afraid to let the banks know that they are competing for your loan. Banking is an extremely competitive business. Don’t settle for talking with your local banker. BFS^® works with more than 60 major banks for this very reason. To learn more see https://bfsinc.net/financing/. Remember, a quarter-point difference in interest rates means a lot of money to you over the term of your loan. While there are certainly other factors that will affect the approval of your loan, covering these items successfully will take you most of the distance.

I hope you find this information helpful. If you need more information related to financing your business acquisition, don’t hesitate to call us at 800-467-1774.

All the best,

Brad Barnett
President, BFS^®
Don’t settle for less than a proven early education company—Talk with BFS^® for the Expertise and Individual Attention you deserve.

The post What Do I Need To Buy A Childcare Company? appeared first on BFS®.

Here are a couple of general rules for your consideration. Your minimum credit score needs to be at least 650. If your credit score is below 650 then there are ways to fix it.  Here’s how it works…

1. You can challenge anything in your credit report.  If the merchant can’t provide proof of their claim, then the item must be removed from your credit report.  For example, if Department Store X says that you didn’t pay-off your $72 balance on your X card in 1997, and you say that you did, then Department Store X has 30 days to provide the documentation proving that the bill is unpaid.  If they can’t prove their claim, then the outstanding debt is removed and you’re moving toward a higher credit score.  If Department Store X is right and you do owe them $72, then you now know the problem and you have the opportunity to pay the $72…again you’re moving toward a higher credit score.

2.  Get and review review copies of your three major credit reports annually–more often if you are nearing pivotal junctures where your credit score is especially important.  Contact information for all three credit reporting agencies can be found at https://bfsinc.net/resources/

3.  Between the reports from Federal Trade Commission (“FTC”) and CBS News, it is estimated that somewhere between five and eighty percent of credit reports contain errors.  Some errors are actually good for you and some are not so good.  In my mid-twenties I checked my credit reports, and I was very happy to learn that not only had I purchased a new car, but I paid it off with a perfect history of payments.  It was great for my young credit history—never did find the car.

4.  Your credit score contains five components.  Here are the five components and their degree of importance by percentage:

a.  Payment History (35%)—Here, the credit bureaus (CBs) are looking at mortgages, credit cards, installment loans, retail accounts, adverse public records like bankruptcy, lawsuits, judgments, liens, garnishments, past due payments…etc.  If you have past due payments, the CBs will look at (a) amount past due, (b) amount of time past due, (c) number of accounts past due.

b.  Amounts Owed (30%)—CBs are reviewing the type of accounts you use and the amount of credit you are utilizing relative to the credit available to you.  For example and all else being equal, a person carrying balances equaling 95% of credit available on ten personal credit cards for a total of $50,000 outstanding debt will have a lower credit score than a person carrying 50% balances on three credit cards for a total of $10,000 outstanding debt.

c.  Length of Credit History (15%)—CBs are examining specific account types, how long the accounts have been open and the level and timing of activity within the account.  Amazingly, for credit scoring purposes it appears that it is actually better to have credit accounts with outstanding balances (within reason) than to have no accounts open or no credit history.  Being debt free can actually lower your credit score.  I have a friend who is a very astute, very successful former international banker.  He has done business in more than 20 countries and has lived in nine countries.  This is a person with exceptional success, wealth, and highly responsible money management practices.  He was turned down when he applied for a credit card at the very bank where he worked.  Reason:  No U.S. credit history.

d.  New Credit History (10%) — In short, the CBs are looking to see if you have been opening or attempting to open lots of new accounts recently.  As you might imagine, someone who is thinking about lending you money gets very nervous when they discover you are borrowing money from everyone.

e.  Type of Credit Used (10%)—CBs look at the balance of debt as distributed throughout the various types of debt from credit cards to mortgages and secured to unsecured.

Your credit score is based on all of the items above.  It is not a pass-fail circumstance for each of the categories.  Your score is produced in the aggregate and that scoring constantly changes.  The scoring for one person and their financial profile will be different from another person.  The information presented here is for the fat part of the Bell Curve, but it provides solid guidelines.

6.  If you are focused on an acquisition (or other type of loan) and your score is below the 650 mark, note that a business partner’s score that is 700 or higher can help to off-set your score.  When lenders are considering borrower qualifications, they look at the entire “borrower” whether it is one person or a legion of people.

The post How High Does My Credit Score Need To Be? appeared first on BFS®.

As it pertains to the buying and selling of an early education company (childcare centers or schools), a Letter of Intent (“LOI”) is a written statement expressing the intention of the participating parties to enter into a formal agreement. A LOI is not a formal agreement or a binding contract. The LOI serves the very important purpose of defining the agreed upon terms of a transaction so there are no misunderstandings between the parties, but it does not provide the detail found in a Purchase Sale Agreement.

Letters of Intent vary in length and amount of detail; however, the goal is to provide enough detail so the major concerns are defined but not so much detail that the document borders on a purchase sale agreement. The following information is found in a well-structured LOI:

A.  Date of the LOI.

B.  Names and Titles–This area should include the complete names of the buying, selling and brokerage companies and the individual signatories for each of these companies along with their corporate titles…President, Secretary, Partner, Managing Member…etc.

C.  Contact information for each of the companies and their representatives.

D.  Asset Identification–The LOI should identify the assets to be bought and sold in the transaction. For example: Assets of ABC Childcare, Inc. and real estate held in the name of XYZ, LLC and used in operations of ABC Childcare, Inc. Said assets and real estate are located at 123 Main Street, Any Town, Any State, 12345.

E.  The Purchase Price.

F.  Amount of buyer’s good faith deposit and the company responsible for escrowing the deposit.

G.  Terms of the transaction—Examples: All Cash at Closing…or $2,000,000 Cash and $250,000 Promissory Note at Closing.

H.  Information pertaining to any lease to be entered into by the buyer. Example: Buyer and Seller agree to enter into a triple net lease with an original term of 10 years and three five-year options. Annual increases in the lease rate will be the lesser of CPI or 2.5% of prior year’s rent. Again, the LOI is not drafting the lease. It is only establishing the primary terms.

I.  Transaction Contingencies. Contingencies are items that would likely cause the buyer, seller or both to walk away from the transaction should there be a disagreement. For examples:

• All Cash and Accounts receivable accrued up to the closing date will remain the property of the SELLER.
• Buyer’s Good Faith Deposit will be refunded in full in the event buyer’s due diligence reveals unacceptable conditions.
• Buyer and Seller each agree to pay their respective closing costs.
• Buyer’s Good Faith Deposit will be refunded in full in the event buyer’s financing is denied and written verification is submitted to XYZ Brokerage, Inc. on or before July 1, 20XX.
• Buyer will provide written verification of down payment funds in the amount of no less than $XXX,XXX upon signing of LOI.
• Buyer and seller agree that seller is responsible for the payment of brokerage fees to XYZ Brokerage, Inc. in the amount of $XXX,XXX.

J.  Closing Date—The Closing Date should be stated as On or Before…the Closing Date to provide flexibility to parties involved. Unless there are stated terms to the contrary or “timeline contingencies”, it should also be stated the buyer and seller agree that that the buyer has exclusive right to purchase said assets up to and including the Closing Date.

K.  Timeline Contingencies—These contingencies are the ones that keep a transaction moving forward at a timely pace. While nearly every transaction will have its challenges, it is important to closely watch the amount of time used for the various sub-processes like finishing the purchase sale agreement, securing financing, getting licensing approval, completing Phase One inspections, getting a real estate appraisal, having staff fingerprinted (in some states)…etc. A delay in one process can cause delays in other processes until a transaction stretches to nine months instead of the more normal 90 days. Some examples of timeline contingencies are as follows:

• This LOI becomes invalid if it is not fully executed on or before X date.
• Buyer agrees to provide first draft of purchase sale agreement on or before X date.
• Buyer agrees to submit completed financing application to chosen lender on or before X date.
• Buyer’s lending institution will inform BFS^® representative of preliminary approval of buyer’s financing on or before X date.
• Buyer’s lending institution will inform BFS^® representative of final approval of buyer’s financing two weeks before Closing Date.
• Seller agrees to notify state licensing of pending transaction within three days of receiving fully executed purchase sale agreement and notification of buyer’s receipt of Commitment Letter from buyer’s lender.

L.  A simple but sometimes overlooked item. Include language that allows the LOI to be signed in counter-parts. Again, this is a small item but it can save you days in the process.

A Letter of Intent is a terrific tool for helping to get your transaction off to good start and moving it toward closing more efficiently. While the information above certainly isn’t exhaustive, it provides a great platform. As stated above, always consult the proper professional before acting.

Contact Us if you have any questions about this.

The post What Information Should a Letter of Intent (“LOI”) Include? appeared first on BFS®.

In today’s market, financing a childcare is oftentimes the most difficult hurdle to clear whether you’re acquiring more childcare centers and schools or just refinancing your current debt.  Hence, it is very important to avoid any pitfalls that can make your borrowing process more difficult.  Here are four of the most common mistakes made when applying for a loan.

1.  Applying to only one lender.  Although there are many lenders who want to make good loans, people still tend to go to their local bank first without shopping around.  While lenders are important, they are still vendors who can compete for your business.  As the cost of financing is a material cost, one should always make sure of receiving the best terms to fit the project.  Between banks and the SBA (Small Business Administration), there are many options that can help borrowers be more successful in their endeavors.  It’s always better to at least know which options are available to you.

2.  Not knowing if you demonstrate the ability to repay the loan.  It is very normal to apply for a loan and not know if the bank (or other lender) will approve the loan.  That’s why we go through the lending process.  However and before you apply for a loan, it is a good idea to review your own cash flow internally so you know whether or not you feel you can repay the loan.  Lenders will talk in terms of Debt Coverage Ratio or Debt Service Coverage.  In English, they are simply checking to see if you have enough “cushion” to ensure that they get their money back when they lend it to you.  Before you shop for financing, make sure you can report your income, expenses and profits (or losses) clearly.  Be direct and honest with your lender.  The faster a lender knows your correct numbers, the more quickly he or she can decide whether they can make the loan under terms that are acceptable to all parties.

3.  Not knowing your credit rating.  Every lender is going need to know your credit score before they can do anything.  Before you apply for a loan, you need to know your credit scores.  If you are unsure of your credit score or think you might have blemishes on your credit report(s), it’s best to get copies of the reports from the major credit reporting agencies.  Having the reports in hand allows you or you and your lender to address any potential problems up front.  You can contact the major credit reporting agencies via the Resources Page at www.bfsinc.net/resources/.  (For clarity, BFS^® receives no compensation for providing this access.)

4.  Not having your finances up-to-date.  Whether you are seeking a personal loan or abusiness loan, you will need to have your financial information in order for typically the last two to three complete years and the current year-to-date.  Having this information organized will help to expedite the borrowing process.  Lenders want to make good loans.  The fewer questions they have to ask, the better the experience will be for you and your lender.

Please tell us if you found this article helpful….or tell us what other topics you would like for us to discuss.

The post Top Four Mistakes Buyers Make When Applying for Financing appeared first on BFS®.