It is not uncommon for Business Owner/Sellers to get uncomfortable when a potential Buyer requires a loan to purchase the Seller's business. Often times Sellers will say "the Buyer is the one getting the SBA loan; why am I the one under the microscope?"
If the Buyer does not have sufficient cash to make a straight cash purchase of the business, 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. Supply and demand could also dictate if sellers need to provide seller financing - the higher in demand the business being sold the lower the chances a seller note will need to be provided - this is where SBA loans will come in for Buyers (who should always be professionally pre-qualified or vetted for SBA loan financing).
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 SBA lender will want 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 SBA lender will then qualify the potential business 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 instances the SBA 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 (tax returns, financials - P&Ls, Balance Sheets, Interim Financials) are in order. While the Seller is not necessarily under the microscope, the business being considered for purchase definitely is. So, clean up the books and records/documents, get pre-qualified/vetted by a professional SBA loan Advisor like SBALoanAdvisors.com, or get used to the idea of all Seller financing when selling your business.
Contributor:
Cheryl's a restaurant business broker, over 25 years in the bar and restaurant industry coupled with a J.D. Cheryl works tirelessly to create successful strategies and effective negotiations for those who wish to purchase a new or sell an existing bar, restaurant, cafe, or night club. 415-309-2722
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