Home  >  Discussions  >  Is Cash Flow Critical If Requesting A Business Acquisition Loan?

Is Cash Flow Critical If Requesting A Business Acquisition Loan?

Share This Page    See All Discussions    See All Contributors    All New Discussions & Comments

Comments & Replies: 1     Views: 2209     Posted By: Peter Siegel MBA  



Topics: Business Purchase Financing, Buying A Business     Tags: buying a business, financing, non SBA loans, SBA loans



Applying for a business acquisition loan can be challenging for someone who hasn't been through that process in the past. If she has a home mortgage or has financed a car purchase, she knows that the value of the property being pledged has to at least equal the amount of the loan. But when it comes to buying a coin laundry, hamburger restaurant, or any other small business, it's almost impossible to come up with an accurate value. That's one of the reasons that lenders are just as interested in understanding the amount of the cash flow of the business - the money that will be used to pay off the debt - as they are in knowing what the enterprise might be worth.

For the smart buyer, this means demonstrating clearly that the business is generating enough funds that the new owner will be able to make the payments on time. Making that point with the lender involves more than just showing the firm's past profit and loss records. It's likely the books don't reveal the total, actual cash flow soon to be available to the new owner.

Many loan executives involved with small business deals understand that the typical business owner will take advantage of tax breaks to lower reported earnings and reduce the size of payments made to the IRS and the state tax collector. They are informed about add backs for personal items and about non-cash expenses such as depreciation and amortization.

Working With Loan Officers

But it's a mistake to assume that the person asked to approve or reject your loan application has the time and the interest needed to analyze every expense item on a profit and loss statement, and to calculate how much money you actually will take out of the business. This is a situation in which the buyer needs to be actively involved, going over each expense item that might belong on the bottom line and explaining, in as much detail as the lender requires, how much money will truly be available for debt service. Recasting the P&L's should be done when preparing the loan application by including a document that points out items such as amortization, and also does the math. The person evaluating the request should be able to easily see the amount each add back contributes to cash flow.

Valid Information Only When Requesting Business Acquisition Loan

This isn't a task for someone who's new to the experience. It's frequently a good idea to ask for help from a small business loan specialist who understands what addbacks to earnings are legitimate, and which will provoke doubt in the mind of the person reviewing the application. Adding back the expense item called "depreciation," and calling it a non-cash expense, is a sensible argument provided there is no need to replace fixtures, tools or machinery in the near future. And the question of the condition and useful life of every item on the depreciation list will be posed by the reviewing loan officer. The borrower had better have the right answer.

Another way prospective buyer/borrowers get in trouble with add back claims on their loan applications is identifying as personal expenses the costs that are needed to operate the business. A loan officer won’t be persuaded that the seller's vehicle expense is all personal - and the amount spent for it can be added back to earnings for use in loan payments - when the truck is used to make deliveries.

Collateral Also Needed In Many Instances - But Not Always

This discussion of cash flow, and the requirement that it is sufficient to support loan payments, doesn't mean to discount the need to pledge assets to secure the debt. The degree to which lenders rely on cashflow figures when reviewing a loan application depends on the type of lender. On one end of the scale are private investors and non-institutional money sources, mostly concerned that there is more than enough collateral - including assets of the business and other borrower property - to secure the loan. If the borrower defaults, they’ll seize and sell whatever assets are needed for them to recoup their loss.

This contrasts with SBA-backed lenders who are particularly interested in the viability of the business to be purchased. They don't want to take ownership of the collateral used to secure the loan. So they look particularly closely at past performance of the business and try to make a conservative prediction about whether it will produce enough funds for the owner to take care of her debt service.

Whoever the lender, the entrepreneur seeking a business acquisition loan needs to make sure the company’s provable earnings will be sufficient to pay off the loan. And then explain it effectively to the lender.


  Helpful Resources To Assist In Selling And Buying California Businesses

Brad Steinberg, Broker - Laundromat Specialists

Laundry specialists - founded in 1968 by three laundry professionals, PWS is a family-owned corporation. Through the years it has grown to become the largest vended laundry equipment distributor in the United States. Call Brad Steinberg at 323-721-8832 to sell or buy a coin or card laundromat.

Mark Chatow, Esq.: Legal Services For Buying, Selling Businesses

Mark has a broad range of small business purchase & sale experience from analyzing potential acquisition targets to successfully guiding buyers and sellers through the purchase & sale of small businesses. Mark can assist with contracts, negotiations, legal matters, etc. Reach Mark at 949-478-8393.

Elizabeth McGovern: Escrow Services - SF Bay Area

McGovern Escrow Services, Inc., is a leading independent escrow company. We are a trusted partner with our clients, assisting them through the tangled bulk sale & liquor license transfer process. We provide attentive, quality & innovative customer service. Phone Elizabeth McGovern at 415-735-3645.

Diane Boudreau-Tschetter: Escrow And Bulk Sale Services

California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.

Helen Yoo: Escrow & Bulk Sale Services - Southern California

New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.

Willard Michlin, CPA, Certified Fraud Examiner, Due Diligence Services

Willard Michlin, CPA #106752, offers buyers step by step training & assistance in doing Due Diligence Services when they are thinking of making an offer, or are in process of investigating a business purchase. He helps to determine the actual net profit even when there is cash. Call 800-864-0420.

Janet Carrera - Escrow & Bulk Sale Services - SF Bay Area

Redwood Escrow Services, Inc. is a full service, licensed independent escrow company. We are EAFC Fidelity bonded, fully insured & licensed with the Department of Corporations. Committed to offering our clients the most comprehensive variety of escrow services available. Phone Janet at 510-247-0741.


  Related Articles, Events, Blog Posts, Discussions, Videos, Interviews

Absentee Run Small Businesses - Is That Really A Possibility For Buyers?

Is buying a absentee run small business really a possibility? Peter Siegel (BizBen ProBuy Director) gets asked this question a lot in his consulting sessions with business buyers. Read more about what other Advisors and Intermediaries feel about this topic on this popular BizBen Discussion!

5 Myths About Selling A California Business: Best Tips For Sellers & Brokers

Peter Siegel, MBA (at 866-270-6278) - BizBen Director discusses myths associated with the process of selling a business and some of them can actually cause deals to fall through. Don't let your sale be comprised, be aware of these common misconceptions related to the process of selling a business.

Tips For Faster SBA Loan Approvals For California Small Business Purchases

In this article on BizBen, business purchase financing advisor and SBA loan broker, consultant Peter Siegel (Business Purchase Financing Expert/Advisor & the ProBuy Program Director at BizBen) at 866-270-6278 shares his views of getting SBA loan financing faster for business purchase financing.

How Do I Navigate Through The Negotiation Process When Buying A Business?

Negotiating the terms of a business deal is a delicate process, where one wrong move can cost you the business that you wanted to purchase. Peter Siegel, MBA (BizBen ProBuy Program) discusses the ins and outs of negotiations, and how to work well with the seller to get a deal done.

I am Buying A Business: Should I Buy The Property As Well? A Good Decision?

There are advantages and disadvantages to owning commercial property. Here are a few questions to ask when it comes to deciding whether or not to buy the property along with the business. Peter Siegel, MBA with the BizBen ProSell Program reviews this issue with potential sellers and intermediaries.

How Many Listings Is Too Many For One Broker To Handle? Is It 5? 10? 20?

Peter Siegel, MBA in this Vlog/Podcast discusses how many listings is too many for one business broker to handle at one time. Is it 5 is it 20? I recently had a coaching call with one of my BizBen broker clients who asked that question this week. There are many factors that go into the answer.

Uncover Hidden Problems In Due Diligence When You Buy A Small Business

Most everyone who's decided to buy a small business in California knows the importance of due diligence. That involves close examination of a business prior to removing contingencies. But not everyone knows how to uncover problems that are not obvious. Here are five of the most common hidden issues.

Why Deals Fall Out: Unrealistic High Asking Prices Are Usually The Reason

The unfortunate truth is that approximately 50% of all small business sales transactions fall out. While failed transactions can happen for a many reasons, Peter Siegel, MBA (BizBen Director & Business Purchase Financing Expert) discusses the main reason deals fall through; steep asking prices.

See All News, Tips And Events

Chris Lazuric Orange County California Broker
Cannabis Consulting Due Diligence Service
Tim Cunha Business Brokerage
Southern California Legal Services For Buyers And Sellers


Auto Related
Business Services
Children Related
Communication Related
Computer, Internet Related
Construction Related
Entertainment Related
Financial Services
Health, Beauty Related
Home Improvement Related
Maintenance Related
Manufacturing Related
Media, Publishing Related
Pet Related
Photography/Video Related
Real Estate Services
Restaurant, Food Related
Retail Related
Service Related
Sports Related
Transportation Related
Travel Related
Wholesale Related

Auto Body Shops
Auto Repair Shops
Bakeries
Bars, Sports Bars
Cafe Restaurants
Car Washes
Cleaning Services
Clothing, Apparel Stores
Coffee Shops
Convenience Stores
Deli Restaurants
Discount, Dollar Stores
Dry Cleaners
eCommerce Websites
Fast Food Restaurants
Florists, Flower Shops
Full Service Restaurants
Gas Stations
Gift Shops
Gyms, Fitness Facilities
Home Health Agencies
Hotels/Motels
Ice Cream Shops
Juice, Smoothie Shops
Laundromats
Liquor Stores
Markets, Marts
Nightclubs
Pizza Restaurants
Postal, Shipping Stores
Preschools, Day Care
Print Shops
Salons, Beauty Shops
Sandwich Shops
Smog Test Only Shops
Smoke Shops
Spas, Med Spas
Sushi Restaurants
Tire Shops
Towing Services
Vending Routes
Wireless, Cellular Shops
Yogurt Shops

Alameda
Alpine
Amador
Butte
Calaveras
Colusa
Contra Costa
Del Norte
El Dorado
Fresno
Glenn
Humboldt
Imperial
Inyo
Kern
Kings
Lake
Lassen
Los Angeles
Madera
Marin
Mariposa
Mendocino
Merced
Modoc
Mono
Monterey
Napa
Nevada
Orange
Placer
Plumas
Riverside
Sacramento
San Benito
San Bernardino
San Diego
San Francisco
San Joaquin
San Luis Obis
San Mateo
Santa Barbara
Santa Clara
Santa Cruz
Shasta
Sierra
Siskiyou
Solano
Sonoma
Stanislaus
Sutter
Tehama
Trinity
Tulare
Tuolumne
Ventura
Yolo
Yuba

0 to $99,999
$100,000 to $249,999
$250,000 to $499,999
$500,000 to $999,999
$1 million to $2 million
over $2 million




BizBen - Where California Deals Get Done! 888-212-4747
7172 Regional Street #364 · Dublin, CA. 94568
BizBen · Copyright © 1994 - 2017, All Rights Reserved

                       
Sign Up Today - For Our FREE BizBen Weekly Email Newsletter
Includes The Best Info On Buying, Selling, Valuing, Financing California Businesses:
Articles, Blog Posts, Podcasts, Videos/Vlogs, Discussions, Q&A, Workshops, Webinars,
Resources. Watch For An Email Confirmation After Signing Up Above. Thank you.


Please confirm your registration by clicking the link we've sent to .

If you can't see it, please check your junk mail folder.

If you have any problems registering, or need assistance with your new BizBen User Account please phone BizBen Customer Support at 888-212-4747.



First Name:*
Last Name:*
Email Address:*
Confirm Email:*
Create Password:*
Confirm Password:*
Phone:
(   
 


You Are A:
Individual
 
Intermediary
 

Email Address:
Password:
 
Search BizBen.com

500 New & Refreshed Detailed Postings Daily
Over 2500 Resources Available On BizBen
Since 1994. Where California Deals Get Done!
What Should I Do If Other Buyers Are Trying To Buy The Same Business As ...
How To Determine Whether The Buyer For Your Business For Sale Is Sincere...