Buzz Harris
When helping clients buy a business with traditional seller financing, they typically are able to buy a business that is worth 2 1/2 to three times the amount of money that they have put forth as a down payment. Hence, a buyer who has $100,000 cash to invest would likely be able to buy a business earning $100,000 annually which would sell for around $275,000.
However, there are ways for the buyer to leverage their investment funds even further with the help of U.S. Small Business Administration.
SBA has a 7(a) loan program that has been meeting the borrowing needs of businesses for several decades. SBA guarantees 75-85% of the loan, which allows lenders, such as banks, to offer longer terms and a higher loan to value than would be available through conventional loan programs
SBA 7(a) financing can be utilized for a variety of needs for small businesses that include working capital, debt refinance and purchase or refinance of real estate occupied by the business.
One of the most popular uses of SBA 7(a) loans is for the purchase of an existing business. In cases such as this, the buyer should expect to put down at least 15% of the total purchase price, working capital and loan costs. This means that the same buyer who earlier had $100,000 to invest can now buy a business that is earning $240,000 annually having a value of $667,000. This is quite an improvement over the previous scenario.
This is because SBA lenders can loan on hard assets and, more importantly, the goodwill of a business that is often difficult for traditional lenders to fund. The lender will review the financial strength of the buyer to include tax returns, a personal financial statement and a credit report.
Industry and/or management experience is also an important part of the criteria for qualifying. As a buyer, one should be prepared to pledge assets, such as personal residence as collateral for the SBA loan.
The seller of the business will need to furnish the buyer and lender with three years of tax returns, a current financial statement for the business, a list of assets to be sold as part of the transaction and the existing lease for the seller’s place of business. The lender will analyze the historic cash flow of the business and its ability to cover the proposed SBA loan payments and have funds remaining to meet the personal financial needs of the buyer with a small margin of entrepreneurial profit.
In summary, SBA 7(a) financing offers reasonable terms and competitive rates allowing a buyer to buy a business larger than what they might traditionally qualify for. It is a significant program that is truly bringing buyers and sellers of businesses together.
