Seller Expectations With SBA Loan Financing


SBA Loan Purchasing A Business

It is not uncommon for Sellers to get uncomfortable when a Buyer requires a loan to purchase the Seller's business. Often times Sellers will say "the Buyer is the one getting the loan; why am I the one under the microscope?"

If the Buyer does not have sufficient cash to make a straight cash purchase, the Seller can carry a note or the Buyer will have to obtain a SBA business loan. Many Sellers do not want to carry paper; they simply want to be cashed out so they have their funds available to invest in their next venture.

Most business owners think that obtaining a business 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.

Before the bank even looks at the Buyer's information, they want to see if the business qualifies for financing. The Seller will be required to provide the last three years of business tax returns, three years of profit and loss statements, 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 to write a letter of explanation. Each lender has its own procedures and additional requests may include an inventory list, an equipment list, aged receivables report, etc.

The lender wants to see all the books and records of the business to determine if the cash flow from the business will support the debt service of a loan. Lenders will scrutinize the books and records of the existing business to determine their level of risk. In many cases, the Seller's accountant has done an exceptional job of mitigating the Seller's taxes, thereby giving the appearance that the business is losing money or barely surviving. When this is the case, the business does not qualify for the loan so there is no reason for the lender to qualify the Buyer.

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). In some cases the lender will decline the loan if the Buyer does not have a secondary source of income in the household that is substantial enough to cover all the current personal obligations.

The best thing any business owner can do to prepare their business for sale is to make sure their books and records are in order. While the Seller is not necessarily under the microscope, the business definitely is. So, clean up the books or get used to the idea of Seller financing.

Categories: BizBen Blog Contributor, Business Purchase Financing, Selling A Business, Small Business Financing

Contributor:

Peter Siegel, MBA
Areas Served: All Of California
Phone:  925-785-3118 Cell, 925-785-3118 Text
Founder Of BizBen.com (since 1994). I am the Lead Advisor for the ProSell, ProBuy, & ProIntermediary Programs. I consult daily with buyers, sellers, and brokers daily about buying and selling California small to mid-sized businesses. Call 925-785-3118.






  Helpful Resources To Assist In Selling And Buying California Businesses
Janet Carrera: Escrow & Bulk Sale Service - 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.

Shalonda Chappel: Escrow & Bulk Sale Services - Southern California

Escrow services to brokers/agents, sellers, & buyers. Established 43 years. Extraordinary service. Experienced with handling difficult transactions. One stop for all your escrow needs: Bulk sales, lien searches, UCC searches, liquor license transfers, publishing & recording services. 951-808-3972.

Diane Boudreau-Tschetter: Escrow & Bulk Sale Services - CA

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.

Brad Steinberg, Business Broker: Laundromat Specialist

PWS is the leading laundromat broker in California. Since 1968 PWS has brokered over 2,500 laundromat sales. With over 90 employees dedicated to the coin laundry industry, PWS has 18 licensed agents, a 3 person in-house finance department, 10 service technicians and a 20 person parts department.

Helen Yoo, New Century Escrow - Escrow Services In 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.

Elizabeth McGovern: Escrow Services - San Francisco 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.

William F. Ziprick, Attorney: Legal Services For Buyers And Sellers

Through creative problem solving, attention to detail, accessibility, & understanding that unnecessary delay is often a deal killer, I work closely with my clients and other professionals to consistently achieve a high rate of closings. Office: 909-255-8353, Cell: 509-951-7230.


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