The state can help you buy a company or franchise

It's your business

January 28, 1991|By Patrick Rossello

YOU'RE THINKING about purchasing a small business because the economic downturn has lowered selling prices. But you need financial assistance. Where do you turn?

A state agency known around town as "Miss Bidfa" because of its initials -- MSBDFA -- might be able to help. It's the Maryland Small Business Development Financing Authority, part of the Maryland Department of Economic & Employment Development.

MSBDFA's Equity Participation Program can help with the purchase of a business. Eligibility is limited to companies that will be at least 70 percent owned by a minority or an economically disadvantaged person.

You can reach MSBDFA's executive director, Stanley W. Tucker, in Baltimore at 333-4270.

Equity Participation: This program can help you with a loan to buy the business or it can make a direct equity investment into the acquired firm. The money comes directly from MSBDFA rather than from a bank.

The funds must be used for the purchase of the business assets, leasehold improvements or real estate. Sometimes part of the money can be used as working capital. Other allowed uses include major renovations of the business site, the purchase of signage and the payment of franchise fees.

Modifications in the program could emerge from the current session of the General Assembly in Annapolis. Any changes made by the legislature would take effect July 1, 1991.

To apply for a loan under the Equity Participation Program, you must have assets worth at least $75,000 to pledge as collateral. But assets of the business to be acquired do not count. For many people, this means pledging their home or investment securities.

You must also show that you have been unable to obtain a loan from a conventional lending institution.

The collateral is a financial challenge since the amount is in addition to the 10 percent equity you must have invested in the business. MSBDFA hopes legislators will change this provision so the collateral and the 10 percent equity could come from the same funds.

Another proposed modification: to reduce the total amount required to $50,000.

The business you want to buy must have been in operation for at least five years with at least two of the last three showing a profit. The business does not necessarily have to be headquartered in Maryland, but the main part of its operations must be here.

MSBDFA hopes the legislature will permit the acquisition of an out-of-state company if the business is being moved here.

In any review of your application for this or any other MSBDFA program, the state will identify the number of jobs involved in the business and how many additional jobs could be created under your leadership. Since the acquisition is of an existing business, MSBDFA will also look closely at the strength of the customer base.

Limits: The state's participation in your business acquisition is limited to no more than 25 percent of the deal. A proposed change would raise the limit to 35 percent. MSBDFA's investment or loan to you is capped at $500,000. The terms of the loan include interest set at normal market rates -- about 2 percent above the prime commercial bank lending rate -- and repayment of the principal in seven years.

Negotiating a stake: In your discussions with MSBDFA's staff, you may conclude that an equity investment by the state would be more beneficial than a loan. MSBDFA becomes a stockholder that hopes to receive dividends and ultimately to "cash out" or sell the stock in your company at the end of seven years. The state does not want to own the stock indefinitely. MSBDFA's intention is to realize an average annual return over those seven years of 10 to 22 percent based on the original purchase price. This could be a combination of dividends and the proceeds from the sale of stock, which you agree to purchase at the end of the seven years. The specifics would be negotiated by you and a member of the MSBDFA staff and documented in the original contract.

One of the challenges in any stock transaction is to set the value of the stock when it is transferred or sold to another party. If MSBDFA is willing to accept part or all of its repayment from your stock purchase, the state requires that the value be set by the average of three independent appraisals. A stock appraisal can be an expensive proposition, ranging from $5,000 to 15,000 each. One of the proposed changes would reduce the requirement to one. If both you and MSBDFA accept a single valuation, then additional appraisals would not be required. Usually the contract with MSBDFA states that the minimum assessment must not be less than the price MSBDFA originally pays for its stock.

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