One key figure that most buyers of “large” small business find extremely important is annual cash flow – and rightfully so since this is the number that is most keyed to the asking price of the business and the money buyers will derive from operations of the business. This number is also key in the SBA loan underwriting process – get this number incorrect or misrepresent it and underwriting comes to a fast and furious halt.
Most professional business brokers and advisors can guide sellers and buyers to the right way of evaluating annual cash flow and what add-backs will be allowed in both the due diligence process and with the SBA loan underwriting process (this includes the third party evaluation that must be complete as well during the process of procuring an SBA loan to buy a business.
The reason this is so important is that the lender (and you should as well) wants to make sure that there is sufficient funds from annual cash flows to pay back the lender (debt service coverage) and monies left over for the borrower to live off of. Makes sense right?
Some typical financial add backs utilized to compute annual cash flow include:
- Owner’s Annual Salary
- Annual Net Income
- Owners Pension
- Owners Health Insurance Premium
- Amortization
- Depreciation
- Interest Expense (these loans are typically paid off when the business is acquired)
- Rent/Mortgage Payment (if the real estate is also being acquired with the business)
- One Time Business Expense (an annual expense the new owner will not have in the future)
- Salary Expense Of Family Members (who don’t actually work at the business)
Another important cash flow factor to both lenders and business buyers is the “history” of past and recent annual cash flows. Is this number staying steady? Is it decreasing or increasing? The bank/lender will figure these increases or decreases into their underwriting analysis along with approximately thirty other buyer/seller factors to make a determination if the deal is SBA loan credit worthy. Always work with a professional to determine the correct annual cash flow(s) – this will make the SBA loan analysis process much smoother.
