When helping clients buy a business with traditional seller financing, they typically are able to buy a business that is worth two and a half to three times the amount of money that they have to put forth as a down payment. Hence, a buyer who has $100,000 cash to invest would likely be able to buy a business earning $100,000 annually which would sell for around $275,000.
However, there are ways for the buyer to leverage their investment funds even further with the help of the U.S Small Business Administration. SBA has a 7(a)-loan program that has been meeting the borrowing needs of business for almost five decades. SBA guarantees 75 percent to 85 percent of the loan, which allows lenders, such as banks, to offer longer terms and a higher loan value than would be available through conventional loan programs.
SBA 7(a) financing can be utilized for a variety of needs for small business that include working capital, debt refinance and purchase or refinance of real estate occupied by the business. One of the most popular uses of SBA 7(a) loans is for the purchase of an existing business.
In cases such as this, the buyer should expect to put down at least 15 percent of the total purchase price, working capital and loan closing costs. This means that the same buyer who earlier had $100,000 to invest could now buy a business that is earning $240,000 annually having a value of $667,000. This is quite an improvement over the previous scenario.
This is because SBA lenders can loan on hard assets and more importantly, the goodwill of a business that is often difficult for traditional lenders to fund. The lender will review the financial strength of the buyer to include tax returns, a personal financial statement and a credit report.
Industry and/or management experience also is an important part of the criteria for qualifying. As a buyer, one should be prepared to pledge assets, such as collateral for the SBA loan. The seller of the business will need to furnish the buyer and lender with three years of tax returns, a current financial statement for the business, a list of assets to be sold as part of the transaction and the existing lease for the seller’s place of business. The lender will analyze the historical cash flow of the business and its ability to cover the proposed SBA loan payments and have funds remaining to meet the personal financial needs of the buyer with a small margin of entrepreneurial profit.
In summary, the SBA 7(a) financing offers reasonable terms and competitive rates allowing a buyer to buy a business larger than what they might traditionally qualify for. It is a significant program that is truly bringing buyers and sellers of businesses together.