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 Officer Or An Advisor
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&Ls 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 addback 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 May Also Be Needed
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.
About Contributor: For over 25 years Peter Siegel, MBA has provided niche business purchase financial advisory and loan brokerage services with SBA Loans, Non-SBA Loans, Retirement Plan Conversions, Hard Money, Bridge Financing, Note Restructures, etc. He assists with financing for: Business Purchases, Business With Real Estate Purchases, Franchise Resale Purchases, New Franchise Purchases, Pay Off Existing Seller Notes, Partner Buyouts, Employee Buyouts. Peter Siegel can be reached direct toll free at 866-270-6278 regarding getting professionally pre-qualified, advisory & loan placement services.
|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.
|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.
|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 805-428-2063.
|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.
|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.
|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.
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