When Buying A Business with an SBA Loan
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When buying a business with an SBA loan, it’s essential to navigate the process strategically. Here are key factors to consider to ensure a successful transaction and a smooth loan approval.
The Valuation of the Business – What is the business really worth? A comprehensive and accurate business valuation is critical. Lenders and the SBA will require a third-party appraisal to confirm the business’s worth. This ensures the purchase price aligns with market value and the financial health of the business, however, this happens after loan approval. You can negotiate with the seller to split the cost of the valuation to be performed up-front by a vetted unbiased third party – but you’d be wise to do this through your partner bank to make sure the business plan vendor is approved for use or else you could end up having to pay for another valuation report. Short of that – keep in mind the metrics that are used to determine multiples across varying industries, and try to best understand the framework and operations to make sure that multiple is within reason.
Financial Due Diligence – Do your homework! Thorough due diligence is non-negotiable. Review the business’s tax returns, profit and loss statements, balance sheets, and cash flow for the last 3–5 years. Scrutinize any trends that could signal instability, such as declining revenues or increasing debt. Additionally, ensure the business has no pending lawsuits or regulatory issues that could impact operations. Often overlooked with B2B businesses is customer concentration. You’d be wise to ask for a customer list – even if it’s redacted, to make sure that there isn’t a concerning amount of revenue/profit coming from one or two key customers.
Seller Financing? If the seller is willing to offer partial financing, it’s a positive sign of confidence in the business’s future. Seller financing can bridge the gap between the SBA loan amount and the total purchase price, making the deal more feasible. It also demonstrates the seller’s belief in the business’s continued success under new ownership, but keep in mind that the seller note will always be subordinate to the SBA Loan. The seller will be tasked with signing a subordination agreement that spells out plainly that the SBA Loan will always have priority in essentially every capacity.
Industry and Market Conditions – What’s hot and what’s not? Assess the industry’s long-term potential and market conditions. Is the business in a growing or declining sector? What are the trends in the geography in which the business conducts its operations? Consider market trends, customer demand, and competitive positioning which are all crucial for long-term success. Lenders will also look at this to assess the risk level, but more importantly you need to determine these factors yourself to make sure this is the right opportunity for you, and one that you will be comfortable with.
Transition Plan – Change is hard. Having a detailed plan for how you will take over the business and ensure continuity is critical. The SBA and lenders prefer buyers who have transferrable experience as it relates to the industry or can outline a clear strategy for maintaining or improving the business. Transferrable experience in managing budgets and people is imperative for a successful acquisition project when using financing. Putting together an effective transition plan reduces the lender’s risk and boosts your chances of approval significantly. Never skimp on the business plan, this part is extremely important.
SBA Lender Expertise – This Matters. Finally, choosing the right SBA lender is pivotal. You need a lender experienced in SBA transactions for business acquisitions who can navigate complexities and execute the loan efficiently. There are many lenders who are “generalists”– make sure to interview your lender and ask tough questions about their experience, process, and average deal size in opportunities like yours. By focusing on these factors, you can minimize risks, maximize your loan’s chances of approval, and set your business up for success.
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Sebastian H Amieva
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