You are a Buyer; what do you need to successfully acquire an SBA loan? You are a Seller; what can you expect from a buyer’s SBA lender? The answers for both conditions are nearly identical, though the buyer has quite a bit more work to do. Here are some tips that can help both sides in the business for sale transaction.
First, the business should have a steady or upward trend over the past three years and continuity in the current year. A downturn of even 5% is going to raise red flags though less than 10% decline can be acceptable with good explanations. Many other issues are of concern such as customer concentration, buyer’s direct experience, and buyer credit.
Next is a good business plan. Lenders want to see that the buyer/operator has a clear understanding of the business and industry. Plan to include ways to improve the existing business where you see fit. A brief SWOT analysis will go a long way. The buyer and the seller should work on this together. A good seller will have ideas about how to grow a business that will help the buyer produce a good and coherent business plan.
Identify key employees and develop a retention plan. Plan for additional training, potential benchmarks for raises and retention bonuses. This area can be a conundrum, too. Key employees are great as they can be critical to client continuity; but if they are “The Key”, their loss can be a risk for the buyer and lender. Plan for how they might be supported or replaced if necessary.
Training for several weeks up to twelve months should be described. The SBA does not allow the seller to remain past twelve months.
If seller financing is required, understand up front that SBA can and does require the seller note to be on standby for 24 months, then amortized over three to eight years. Every situation is different but be prepared up front.
On other thing – Working Capital. Lenders will want the buyer to be able to articulate a clear understanding of the need for, type of (term or seasonal line, or in some cases, both), and amount of working capital needed for a successful transition and for go forward operations. Some lenders will finance the working capital, but buyers need to understand that there will be requirements for available cash beyond the closing.
Please feel free to call us if you have any questions or would like a confidential consultation. -John Young [email protected]
Sunbelt also handles Mergers and Acquisitions.