BEFORE YOU BUY OR SELL A BUSINESS with Jared W. Johnson
The amount of information regarding SBA loans and business acquisitions is scarce and causing buyers and sellers to become frustrated. The amount of misinformation is even more alarming. The vast majority of problems have arisen from the substantial difference in each banks credit philosophy when it comes to business acquisitions. I would venture to guess that only 5 of the several thousand active SBA lenders complete somewhere around 70% of all business acquisitions that use SBA financing to complete the transaction. Let that sink in for a minute. Please make sure you are working with a very experienced SBA lender who specializes in business acquisition financing.
SBA Loans
The amount of information regarding SBA loans and business acquisitions is scarce and causing buyers and sellers to become frustrated. The amount of misinformation is even more alarming. The vast majority of problems have arisen from the substantial difference in each banks credit philosophy when it comes to business acquisitions. I would venture to guess that only 5 of the several thousand active SBA lenders complete somewhere around 70% of all business acquisitions that use SBA financing to complete the transaction. Let that sink in for a minute. Please make sure you are working with a very experienced SBA lender who specializes in business acquisition financing.
SBA lenders typically look at the seller’s information first and foremost to make sure the business is priced accordingly and there is enough cash flow to cover the loan payments. The cash flow utilized by the lender to determine loan repayment ability can drastically differ in comparison to what is listed on the brokers write up or marketing materials. Keep in mind that SBA lenders are required to use tax returns and you’ll find it very unusual that a lender will allow any undocumented addbacks.
SBA Lenders usually use EBITDA, officer’s compensation, and occasionally owner’s auto expense. There are of course situations that make sense to use much more than this, but they will certainly never use unreported income (cash held off books) or outrageous seller’s expenses that are not a normal part of business- personal expenses like credit card spending and home renovations, etc. Please keep in mind that the SBA essentially does not want lenders aiding and abetting tax fraud. The cash flow used by a lender will typically be the same that a required third party appraiser will use as well so even if the deal has enough cash flow the appraisal also needs to support the purchase price.
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