How to Acquire a Business Using SBA Financing

Summary

In this episode of the Investor Financing Podcast, the host outlines the steps and key documents required to secure SBA financing for business acquisitions. He emphasizes the importance of obtaining three years of tax returns, a personal financial statement, and a business resume for both buyers and sellers. The process involves evaluating eligibility, structuring the loan, and ensuring proper collateral. The typical timeline for loan approval is 60 days, although it can vary based on deal complexity. The host also provides tips on overcoming liquidity challenges and invites listeners to schedule a consultation for personalized advice.

Takeaways

• 😀 Get the past 3 years of tax returns (2021, 2022, 2023) and year-to-date financials to evaluate a business acquisition deal for SBA Loans.
• 😀 A completed SBA Form 413 (personal financial statement) is essential for analyzing a deal. You can Google it or use the bank's version.
• 😀 Submit your personal tax returns (3 years), a recent paycheck stub, and a resume or bio outlining your experience for business management and ownership.
• 😀 Once initial documents are submitted, a term sheet is created. This is not a loan commitment but indicates loan eligibility.
• 😀 Cash flow is crucial. The existing business's cash flow must be sufficient to cover the new debt payments for an SBA 7A loan.
• 😀 The SBA loan eligibility requires a debt service coverage ratio of at least 1.15. Seller financing may help strengthen a deal if cash flow is weak.
• 😀 After signing the term sheet, a third-party business valuation is ordered for deals over $250,000, and further financial documents are requested.
• 😀 SBA loan processing typically takes 50-70 days, with real estate involvement potentially causing delays due to construction or documentation requirements.
• 😀 When no real estate is involved, business acquisitions can close within about 60 days, and in some cases, even in 30 days.
• 😀 If additional collateral is required for loans over $500,000, banks may request a lien on primary or rental property, but this is usually not necessary for smaller loans.
• 😀 Typically, you need 10% equity injection and 10% post-close liquidity to secure SBA financing. Seller financing or investors can be used to improve liquidity if needed.

Q & A

What are the key documents required to start evaluating a business acquisition deal?

The key documents required include the seller's tax returns for the past three years (2021, 2022, 2023), interim financials, a balance sheet (if available), and a personal financial statement (Form 413) from the buyer.

Why is it important to obtain the seller's tax returns before proceeding with an SBA loan?

The SBA underwrites loans based on tax returns, so obtaining the seller's tax returns is crucial for evaluating the business's financial health and determining eligibility for financing.

What is Form 413, and why is it necessary for buyers seeking SBA financing?

Form 413 is the SBA personal financial statement. It provides the lender with a detailed overview of the buyer's personal finances to assess their ability to manage and repay the loan.

How does the SBA loan underwriting process work?

The SBA loan underwriting process involves reviewing the buyer's financial documents, assessing the cash flow of the business to ensure it can support the new debt, and ensuring the debt service coverage ratio is above 1.15.

What is the debt service coverage ratio, and why is it important?

The debt service coverage ratio (DSCR) is a measure of the business’s ability to cover its debt payments. For SBA business acquisitions, this ratio must be greater than 1.15 to be eligible for financing.

What is the typical timeline for securing SBA financing for a business acquisition?

The process usually takes between 50 to 70 days, depending on the complexity of the deal. It can be faster (around 30 days) for simple business acquisitions with no real estate involved, but it can be longer if real estate or construction is part of the deal.

What additional steps are involved after receiving a term sheet?

Once a term sheet is received, the lender will begin the process of full loan commitment, which includes ordering a third-party business valuation (for deals over $250,000), verifying financials, and obtaining additional forms from the buyer.

What is seller financing, and how can it help in securing an SBA loan?

Seller financing involves the seller providing part of the purchase price as a loan to the buyer. This can help strengthen a deal, especially when the buyer has limited liquidity or needs to reduce their equity injection.

What is the minimum equity injection required for SBA business acquisition loans?

The minimum equity injection required is typically 10% of the purchase price, along with an additional 10% post-close liquidity to ensure the business remains financially stable.

Is additional collateral required for SBA loans over $500,000?

Yes, for loans over $500,000, additional collateral may be required, such as a second lien on real estate. However, for loans under $500,000, additional collateral is generally not necessary unless the deal is considered weak.