SBA-backed lenders, asked for business acquisition financing, are particularly interested in the adjusted net earnings or cash flow produced by the company to be purchased. The loan officer wants to make sure there will be enough income for the new owner to make those loan payments. But the ability of a business to generate sufficient funds to support the debt may not be obvious. The financial reports are likely to reflect the seller's interest in lowering taxable income, rather than show all of the money actually received by the seller.
To get his loan application approved, the borrower needs to know how to interpret the financials so a loan officer can understand the actual cash figure that will be available for debt service. And that means knowing where to find all the company's earnings in its operating figures. Some of the clues include:
Treatment Of Discretionary Expenses With Business Acquisition Financing
Interpreting a profit and loss statement to show all of the cash that can be available to a new owner requires understanding how discretionary funds--those listed on the seller's statements - might be allocated. The discretionary category includes money set aside for replacement of hard assets (depreciation) and for "writing off" the cost of intangible assets (amortization). Payments for interest and taxes also belong in this category. These expenses are discretionary because the choice of how to allocate them is specific to the needs of the individual owner.
For example, the seller might deduct sums from earnings to allow for depreciation and amortization, but the buyer may want to use that money for payment of principal and interest on obligations incurred to purchase the business.
Add Back Personal Expenses
Some expenses shown on a business profit and loss statement might more accurately be described as personal expenses. The company paying the seller's life and health insurance premiums could, instead, help retire purchase debt owed by the buyer rather than covering her insurance needs. Other dollar costs paid by the business, providing benefit to the owner and not necessary to the operation of the business, can include magazine subscriptions, membership fees for social organizations, and automobile expenses.
While it should seem obvious to most people that spending for personal items doesn't really add to the costs of doing business, this is a fact that may be overlooked by a loan officer; one who is inexperienced or in a hurry because of a large workload. That's why the buyer or perhaps a knowledgeable loan specialist representing the buyer - needs to make sure to explain every relevant entry in the business books when they are being scanned as part of the loan application review.
One-Time Costs Can Be Addbacks
And there are business expenses incurred by the seller of a business that reduce the stated income, but won't have to be paid by the new owner. That's the situation, for example, when purchasing new equipment or leasehold improvements that are not placed on the depreciation schedule. Settling a lawsuit with a cash payment or expanding into adjoining space are other examples of non-recurring costs that won't impact the earnings of the company under its new ownership the way they reduced the income generated by the business when the seller was owner.
But It's Risky To Get This Wrong In A Business Acquisition Financing Request
If the buyer is not entirely knowledgeable about how to restate earnings, it's best to engage the services of an experienced business purchase financing advisor, so the information provided for a lender's review for business acquisition financing is entirely accurate. That write-off of auto expenses, for instance, may be an expense that can be added back to earnings, but only if the owner's car is not used in operating the business. Trying to convince a loan officer that a listed business expense will not be incurred by the purchaser can be counter productive if it isn't true.
And it would be a mistake to add back the cost of the bookkeeper with the argument that payments to the seller's family member for that service is not an expense that will be incurred by the new owner. In fact, the bookkeeper may be replaced under the new ownership, but the company still might need that service and it will represent a legitimate expense. It's not an addback of a personal item.
SBA-backed lenders, when asked for business acquisition financing, are particularly interested in the company's provable adjusted net income and cash flow. They want to make sure the money will be there for the new owner to meet the loan repayment obligation. That's why it's important for a prospective borrower to make sure all actual cash generated by the business for its owner is identified when the company's records are being examined by lenders or financial institutions.
About The Author: For over 25 years Peter Siegel, MBA has provided niche business purchase financial advisory and loan placement/brokerage services with SBA and Non-SBA Loans, Retirement Plan Conversions, Hard Money, Note Restructures, etc. He assists with financing for: Business Purchases, Business With Real Estate Purchases, Down Payment Financing, Franchise Resale Purchases, New Franchise Purchases, Pay Off Existing Seller Notes, Partner Buyouts, Employee Buyout. Peter Siegel can be reached direct toll free at 925-785-3118 regarding getting professionally pre-qualified, advisory & loan placement services.
|Helpful Resources To Assist In Selling And Buying California Businesses|
|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.
|Shalonda Chappel-Pilgram: Escrow Services - Southern CA
Escrow services to brokers & agents, owner/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.
|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.
|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.
|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.
|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.
|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.
|Jeff Sacher, Business Broker - North Bay Restaurant, Retail Specialist
Jeff is a leader in business brokering in the North Bay. Since joining Santa Rosa Business And Commercial in 1999 he has assisted Buyers and Sellers in over 200 business sales and acquisitions. Jeff provides other services for his clients as well. Reach Jeff and his team at 707-888-4972.
|Related Articles, Events, Blog Posts, Discussions, Videos, Interviews|
|Preparing Your Bay Area Business For Sale: Accounting & Financial Statements
The first thing you should start working on when selling your business is getting your financial statements in order. Having correct, easy to read, simple financial statements Is key in showing interested buyers. Rob Hartman (SF Bay Area Business Broker) shares his experience.
|Purchase A Business With Limited Or No Cash - Financing Tips For Buyers
Purchasing a business with no money down can be difficult, but not impossible. Financing a business purchase or down payment can often be accomplished with these strategies from Peter Siegel, MBA (Business Purchase Financing Expert, ProBuy & ProSell Program Advisor with BizBen) at 925-785-3118.
|Due Diligence Checklist: 10 Key Items To Investigate When Buying Businesses
Buying a California small business involves reviewing due diligence checklists so buyers can learn enough to determine whether to proceed with a deal. Here's a due diligence checklist. Peter Siegel, MBA (BizBen ProBuy Advisor & Business Purchase Financing Expert) at 925-785-3118 shares his views.
|BizBen Index: Weekly Results - 274 California Businesses Sold 5/21 - 5/25
For the week of 5/21 thru 5/25, 274 California small businesses were sold by business owners, business brokers, and agents. In 2017 16,956 CA small businesses were sold. So far this year (2018) 3,896 small to mid-sized California businesses have sold so far by business owners, agents, and brokers.
|An Alternative Approach To Finding And Buying An Absentee Run Small Business
As a SF Bay Area business broker (Rob Hartman), the phrase I hear often from my buyer clients is, "I am looking for an absentee run business." Since it is such a popular topic, let me offer an alternative method of business selection. There are a couple things to keep in mind as you search.
|Thinking About Selling A Small Business? Know These 8 Factors That Matter
The likelihood of selling a business is often determined by external factors in the marketplace. Here are eight influences on how easy, or difficult it might be when selling a small California business. Peter Siegel at 925-785-3118 (BizBen ProSell Program) explains these factors for owner/sellers.
|Selling Your SF Bay Area Business: 3 Keys To Better Financial Statements
When you are selling your business, your presentation, for the most part, is going to be your financial statements. Everything begins there. SF Bay Area Business Broker Rob Hartman discusses how to best present your financial statements and what should be included when selling.
|Getting An SBA Loan To Buy A Small Business: Dispelling Some Major Myths
When seeking SBA loan financing many potential business buyers have wrong information about the process of securing the best financing to buy a business. Peter Siegel, MBA (at 925-785-3118) a business purchase financing expert delves into the myths and facts regarding SBA loan financing.
|See All News, Tips And Events|