Cash Flow Is Critical If Requesting A Business Acquisition Loan


Cash Flow Is Important To Business Financing

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.

Categories: BizBen Blog Contributor, Business Purchase Financing, Buying A Business, How To Buy A Business

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
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.

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.

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.

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.

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.

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.


  Related Articles, Events, Blog Posts, Discussions, Videos, Interviews
Valuing A Business - Do You Add The Inventory Amount To The Price Or Not?

A business buyer asks how to handle the inventory amount in the purchase price of a business. Do you add the inventory value to the business value? Peter Siegel, MBA (ProBuy & ProSell Program Advisor - Lead Facilitator ) answers this question with the BizBen Network of advisors and resources.

4 Reasons Why Business Brokers Do Not Cooperate With Other Brokers & Agents

Despite challenges in the business for sale marketplace, some of the business brokers who make a living by facilitating a deal between buyer and seller are known to stand in the way of a completed transaction because of some outdated ideas. Too bad they put greed ahead of the needs of their clients.

Computing All Add Backs: Defining Adjusted Net Income When Buying A Business

The use of add backs & adjusted net income is common among sellers of businesses when showing their financial information/performance. But buyers are cautioned to review financials and tax returns/documents closely. Peter Siegel, MBA with BizBen (ProBuy & ProSell Advisor, Lead Facilitator) explains.

How to Sell Your Small Business: Tips For Selling Your California Business

Peter Siegel, MBA - Lead Advisor with the BizBen.com ProSell Program discusses critical steps to prepare a California small business for sale including: which documents will be needed, key advisors to have involved, pricing the business, and how to attract the right business buyers to your listing.

Selling My Small Business: What Items Should I Have Ready To Be Successful?

When selling a small to mid-sized business, owners should have their paperwork and financial information ready to go! They should also have a short business plan of past history, current operations, and potential for the future. In this BizBen Discussion several advisors and intermediaries weigh in.

Should I Buy A Business That is Losing Money? Feedback From Top Advisors

Are businesses worth taking a look at when they are losing money? Multiple Advisors & Business Brokers weigh in on this topic and say yes! (but be careful) on a BizBen Discussion. Some great feedback on this topic will make potential business buyers (and money losing sellers) want to read this info!

What Are Business Buyers Biggest Mistakes? The Pros Examine The Most Common

A business buyer in our ProBuy Program searching to buy a California business asked me to sum up what I though the biggest mistakes business buyers make when they search for and bought a small business. I asked BizBen ProIntermediaries their thoughts on the matter and received a diverse response.

Why Isn't My Business Selling? 6 Great Questions To Ask Yourself For Answers

It can take months, sometimes longer to sell a small business. Here are 6 questions from Peter Siegel, MBA (Business Purchase Financing Expert, ProSell Program Advisor with BizBen) at 925-785-3118 to ask yourself to help you determine why your small to mid-sized California business isn't selling.


Escrow Services Diane Boudreau-Tschetter
Escrow Services From Helen Yoo New Century Escrow
Bill Ziprick Legal Advise
Brian Loring Business Brokerage Specialty
Facebook
Twitter
Linkedin
Vlogs and Podcasts
Advertise On BizBen
BizBen ProSell Program
Business For Sale California Stats
BizBen Blogs And Articles
California Educational Events Buying And Selling Businesses
BizBen ProBuy Program

BizBen - Where California Deals Get Done! 888-212-4747
7172 Regional Street #364 · Dublin, CA. 94568
BizBen · Copyright © 1994 - 2020, All Rights Reserved



Clost Login


Please confirm your registration by clicking the link we've sent to .

If you can't see it, please check your junk mail folder.

If you have any problems registering, or need assistance with your new BizBen User Account please phone BizBen Customer Support at 888-212-4747.



First Name:*
Last Name:*
Email Address:*
Confirm Email:*
Create Password:*
Confirm Password:*
Phone:
(   
 


You Are A:
Individual
 
Intermediary
 

Email Address:
Password:
 

500 New & Refreshed Detailed Postings Daily
Over 2500 Resources Available On BizBen
Since 1994. Where California Deals Get Done!
Unreported Income Cash Claims By The Seller-What Should A Business Buyer...
Read More News
Buy A Business Or Start From Scratch? 5 Key Differences For Business Buy...
Read More News