Large SBA Loan Financing: Why Business Sellers Should Be Vested
It is not uncommon for Owner/Sellers to get uncomfortable when a potential Buyer requires a SBA 7a loan to purchase the Seller's business. Often times Sellers (and some uneducated intermediaries) will say "the Buyer is the one getting the loan; why am I (the seller) who should care?" My response to my seller clients and intermediaries (business brokers & agents) is - this greatly opens the pool of potential business buyers - if buyers are able to leverage their cash on hand - this provides many more potential buyers (and a possible cash out) for the owner/seller!
Most business owners think that obtaining a large SBA loan is similar to obtaining a home loan as long as the Buyer has good credit and a decent sized down payment, the loan should be approved. Unfortunately that is not the way it works. There are approximately thirty factors that are taken into consideration when lenders review a loan request. Half of these factors are related to the buyer the other factors relate to the sell side.
Before the lender even looks at the Buyer's information, they want to see if the business qualifies for SBA loan financing. The Seller will be required to provide the last three years of business tax returns, three years of profit and loss statements (and possible other financial info), a copy of the lease, interim profit and loss statement and balance sheet. If there has been a decline in revenue over the past three years, the lender may require the Seller (or Broker/Agent) to write a letter of explanation. Every lender has its own procedures (and underwriting criteria) and additional requests may include an inventory list, an equipment list, aged receivables report, etc.
SBA lenders want to see all the books and records of the business being sold to determine if the annual cash flow from the business will support the debt service of the loan as well as the annual living expenses of the borrower. In many cases, if the Seller's accountant has done an exceptional job of mitigating the Seller's income taxes, thereby giving the appearance that the business is losing money or barely surviving, it will take a professional SBA loan advisor to review these "write-offs" to see if they can be "added back" for a more realistic view of the businesses financial situation.
If the business does cash flow sufficiently, the lender will then qualify the Buyer. In addition to good credit and a sufficient down payment, the lender wants to be sure that the borrower will derive enough income from the business to replace any income they are leaving (the Buyer may be quitting a job). Again, lenders look at about fifteen factors (depending on the type and size of business being purchased, licenses held by the business, etc.) from a potential buyer to see if they qualify for SBA loan financing.
The best thing any business owner/seller can to prepare their large small business for sale is to make sure they have all the necessary documents and information ready and presentable for a professional pre-flight or pre-qualification - this will exponentially increase not only the number of potential buyers but also chances of a potential buyer getting SBA loan financing to successfully close a deal.
About The Author: Peter Siegel, MBA is the Founder of SBALoanAdvisors.com and is a specialist assisting clients with obtaining large SBA loans ($500K to $5M) for "large" small business (with or without real estate) purchases, debt refinancing, partner buyouts, working capital, expansion purposes, etc. You can reach Peter direct regarding getting professionally pre-qualified, pre-flighting a deal, or submitting a package for underwriting at 888-231-2182 or 925-785-3118.
