Hawaii Businesses For Sale

Based on our conversations with both business Sellers and Buyers, here is information that are always of interest:

Seller’s Discretionary Earnings & EBITDA

Seller’s Discretionary Earnings (“SDE”) is an estimate of the total financial benefit an owner operator (and his/her family) gets from his/her business on an annual basis. SDE is designed to allow business buyers to make “apples to apples” comparisons when evaluating businesses. Most sold business “comps” report their data using SDE figures. SDE is calculated as follows:

Owner compensation, salary, profit sharing, etc., plus
Employer portion of payroll taxes (FICA, FUTA, worker’s comp., etc.) on owner’s compensation only, plus
Pretax business net income, plus
“Discretionary expenses” or “perks” that benefit the owner but are not essential for the business; common examples include:
- Health and/or life insurance for one owner/ owner’s family
- Personal use automobiles expensed to the business
- Travel, meals and entertainment not needed for the business
- Personal use/consumption of products/ services
- Any personal expense paid for by the business
- Family members on the payroll but not really working in the business, plus
Interest expense (because business debt is a “non operating expense” and assumed to be paid off),, plus
Depreciation and amortization (non cash expenses), plus
Adjustments for extraordinary, non recurring expenses or revenue (e.g., expenses from a rare lawsuit or flood damage would be added back), plus

SDE is important because it is considered the best overall measure of the profitability of small, owner-operated businesses. For larger and/or investor-operated businesses, e.g., those with $500,000 or more of EBITDA (Earnings before Interested Taxes Depreciation and Amortization), EBITDA is generally used instead. EBITDA (investor realized earnings) equals SDE (owner operator earnings) less the normal, annual compensation the investor would need to pay a qualified general manager to run the business.

Bank Financing

SBA business loans (see SBA web site http://www.sba.gov ), which are offered by both Hawaii banks and banks on the mainland, are available for financing the acquisition of the business assets, working capital and buildings of a business. The loans are made by banks and are partially guaranteed by the SBA. Currently rates are historically low and generally are variable and are tied to an index like Prime rate.

SBA interest rates, for qualified buyers and for businesses which qualify, are about 2 to 2 ½ points over Prime and with Prime currently at 4%, SBA interest rates are about 6.5% plus fees. The term of the loan is generally determined by the weighted mix of assets, working capital and real property. Currently, the term on business assets is 10 years for the business assets, 7 years for working capital and 20 years for real property.

This is just an example, and you should consult your banker for specific deals.

Some Hawaii banks to consider:

Bank of Hawaii www.boh.com/smbus/486_550.asp

First Hawaiian Bank www.fhb.com/loans-bus-sba.htm

American Savings Bank www.asbhawaii.com/business

Central Pacific Bank www.centralpacificbank.com/Business/Products/Loans.aspx

PLEASE NOTE THAT SBA REGULATIONS AND INDIVIDUAL BANK REQUIREMENTS CONSTANTLY CHANGE TO MEET THE NEEDS OF THE MARKET AND GOVERNMENT REGULATIONS AND THAT THE INFORMATION PRESENTED HERE MAY CHANGE BETWEEN THE TIME IT WAS WRITTEN AND WHEN IT IS READ, SO THEREFORE, PLEASE CONTACT THE SBA OR YOUR BANKER FOR THE THEN EFFECTIVE INFORMATION AND REGULATIONS.

Information about the Hawaii General Excise Tax for Hawaii Business Owners

Unlike many mainland states, Hawaii does not have a “sales tax”, but instead has a “General Excise Tax”. The following is some general information about this tax as it applies to business on Maui. This information is taken from HI Tax Form, G-45 GET Instructions, Rev. 2012:

http://www.state.hi.us/tax/2012/g45ins.pdf

The General Excise Tax

The GET is a privilege tax imposed on business activity in the State of Hawaii. The tax is imposed on the gross income received by the person engaging in the business activity. Activities subject to the tax include wholesaling, retailing, farming, services, construction contracting, rental of personal or real property, business interest income, and royalties. This is not a complete list of activities subject to the GE

Who Must File

Every person doing business in Hawaii during the taxable year must get a GET license and file the appropriate returns, regardless of how much income the business earns, and whether or not the business also incurred losses. Every person receiving rents from real property owned in Hawaii is considered to be doing business, and must file returns

Filing Frequency

The periodic returns (Form G-45) are used to report gross income, exemptions/deductions, and tax due on business activities periodically. They must be filed throughout the year at specified intervals. The frequency you file depends on the amount of GET your business has to pay during the year.

You must file monthly if you will pay more than $4,000 in GET per year.
You may file quarterly if you will pay $4,000 or less in GET per year.
You may file semiannually if you will pay $2,000 or less in GET per year

On Hawaii the tax rate is 4% except for wholesaling where the rate is 0.5%. Since this is a tax gross receipts tax each business pays 4% of their total receipts including any tax they collect from their customers. Therefore, most Hawaii businesses charge their customers a tax of 4.167%. An example, shows the details of this:

Retail price of an item: $100.00

Tax charged to customer + $4.17

Total amount paid by customer $104.17

Total receipt by business $104.17

GET tax paid to HI at 4% - $4.17

Net to business after GET $100.00

We do not provide tax advice and encourage you to discuss this important tax issue with your tax advisor who is knowledgeable about Hawaii tax laws and regulations. Failure to pay, like all taxes, will result in interest and penalties.

Foreign Buyer Information

Some of the businesses we have for sale should meet the requirements of the US State Department such that a qualified foreign national can use the business purcahse as a way to obtain a UD "green card". Details about the EB-5 Immigrant Investor program are shown below, from the US Department of Homeland Security, United States Citizenship and Immigration Services (“USCIS”) web site:

http://www.uscis.gov/eb-5

Visa Description

USCIS administers the Immigrant Investor Program, also known as “EB-5,” created by Congress in 1990 to stimulate the U.S. economy through job creation and capital investment by foreign investors. Under a pilot immigration program first enacted in 1992 and regularly reauthorized since, certain EB-5 visas also are set aside for investors in Regional Centers designated by USCIS based on proposals for promoting economic growth.

All EB-5 investors must invest in a new commercial enterprise, which is a commercial enterprise:

Established after Nov. 29, 1990, or
Established on or before Nov. 29, 1990, that is:1. Purchased and the existing business is restructured or reorganized in such a way that a new commercial enterprise results, or2. Expanded through the investment so that a 40-percent increase in the net worth or number of employees occurs

Commercial enterprise means any for-profit activity formed for the ongoing conduct of lawful business including, but not limited to:

A sole proprietorship
Partnership (whether limited or general)
Holding company
Joint venture
Corporation
Business trust or other entity, which may be publicly or privately owned

This definition includes a commercial enterprise consisting of a holding company and its wholly owned subsidiaries, provided that each such subsidiary is engaged in a for-profit activity formed for the ongoing conduct of a lawful business.

Note: This definition does not include noncommercial activity such as owning and operating a personal residence.

Job Creation Requirements

Create or preserve at least 10 full-time jobs for qualifying U.S. workers within two years (or under certain circumstances, within a reasonable time after the two-year period) of the immigrant investor’s admission to the United States as a Conditional Permanent Resident.
Create or preserve either direct or indirect jobs:

Direct jobs are actual identifiable jobs for qualified employees located within the commercial enterprise into which the EB-5 investor has directly invested his or her capital.

Indirect jobs are those jobs shown to have been created collaterally or as a result of capital invested in a commercial enterprise affiliated with a regional center by an EB-5 investor. A foreign investor may only use the indirect job calculation if affiliated with a regional center.

Note: Investors may only be credited with preserving jobs in a troubled business.

A troubled business is an enterprise that has been in existence for at least two years and has incurred a net loss during the 12- or 24-month period prior to the priority date on the immigrant investor’s Form I-526. The loss for this period must be at least 20 percent of the troubled business’ net worth prior to the loss. For purposes of determining whether the troubled business has been in existence for two years, successors in interest to the troubled business will be deemed to have been in existence for the same period of time as the business they succeeded.

A qualified employee is a U.S. citizen, permanent resident or other immigrant authorized to work in the United States. The individual may be a conditional resident, an asylee, a refugee, or a person residing in the United States under suspension of deportation. This definition does not include the immigrant investor; his or her spouse, sons, or daughters; or any foreign national in any nonimmigrant status (such as an H-1B visa holder) or who is not authorized to work in the United States.

Full-time employment means employment of a qualifying employee by the new commercial enterprise in a position that requires a minimum of 35 working hours per week. In the case of the Immigrant Investor Pilot Program, "full-time employment" also means employment of a qualifying employee in a position that has been created indirectly from investments associated with the Pilot Program.

A job-sharing arrangement whereby two or more qualifying employees share a full-time position will count as full-time employment provided the hourly requirement per week is met. This definition does not include combinations of part-time positions or full-time equivalents even if, when combined, the positions meet the hourly requirement per week. The position must be permanent, full-time and constant. The two qualified employees sharing the job must be permanent and share the associated benefits normally related to any permanent, full-time position, including payment of both workman’s compensation and unemployment premiums for the position by the employer.

Capital Investment Requirements

Capital means cash, equipment, inventory, other tangible property, cash equivalents and indebtedness secured by assets owned by the alien entrepreneur, provided that the alien entrepreneur is personally and primarily liable and that the assets of the new commercial enterprise upon which the petition is based are not used to secure any of the indebtedness. All capital shall be valued at fair-market value in United States dollars. Assets acquired, directly or indirectly, by unlawful means (such as criminal activities) shall not be considered capital for the purposes of section 203(b)(5) of the Act.

Note: Investment capital cannot be borrowed.

Required minimum investments are:

General. The minimum qualifying investment in the United States is $1 million.
Targeted Employment Area (High Unemployment or Rural Area). The minimum qualifying investment either within a high-unemployment area or rural area in the United States is $500,000.

A targeted employment area is an area that, at the time of investment, is a rural area or an area experiencing unemployment of at least 150 percet of the national average rate.

A rural area is any area outside a metropolitan statistical area (as designated by the Office of Management and Budget) or outside the boundary of any city or town having a population of 20,000 or more according to the decennial census.

Last updated: 07/03/2012