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.
About: Peter Siegel, MBA is the Founder & Senior Advisor (ProBuy & ProSell Programs) at BizBen.com (established 1994, 8000+ California businesses for sale, 500 new & refreshed postings/posts daily) working with business buyers, small business owners/sellers, business brokers, agents, investors, and advisors. Reach him direct at 866-270-6278 to discuss strategies regarding buying, selling, (or financing a puchase of) California small to mid-sized businesses.
|Helpful Resources To Assist In Selling And Buying California Businesses|
|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.
|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.
|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.
|Joe Sandbank, Esq. - Legal Services
I have provided legal counsel to business buyers, sellers and brokers for over 17 years. With prior experience as a business broker and SBA loan officer, Joe brings both a practical and legal approach to all aspects of the business acquisition process.
|Ranvir S. Sandhu, Esq. - Legal Services For Buyers And Sellers
I've worked at top Bay Area law firms and have extensive experience with business entity formation, mergers, dissolutions, conversions, employment matters, including experience in reviewing and negotiating transactional documents such as leases and purchase agreements.
|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 805-428-2063.
|Brad Steinberg, Broker - Laundromat Specialists
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.
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