The U.S. Small Business Administration’s lending year ended on September 30th, 2015. More than $23.5B was loaned nationally under SBA programs. Approximately 90% of this capital was used by people to acquire an existing business.
There are distinct advantages for a business buyer to utilize an SBA loan verses conventional lending: a higher loan to value ratio, the term of the loan may be fully amortized for 10 years or more, a loan may include proceeds to be used for working capital and arguably most notable, goodwill is a financeable asset.
These statistics should excite most business sellers contemplating exiting their businesses as this is a viable method to fund the sale of your business – up to $5M. However not every business will qualify.
Following the suggestions below will help to ensure that your business will meet SBA / lender requirements:
1) Don’t waste time verifying personal expenses run through the business to increase SDE. Many of these that you may have enjoyed or benefited from in the past will be disallowed by the lender, lowering adjusted earnings (EBITDA or SDE) therefore lowering value.
2) Cleanup the financial reporting by:
• Removing personal assets from the Balance Sheet
• Make sure the income and expense statements are verifiable (from source documents like bank statements, invoices, etc.) beginning with top line revenue down to net income.
• Optimize all of your source documents and all other records to make the due diligence process is effective and efficient.
• Clean up your aging reports to avoid uncomfortable or unnecessary explanations.
3) Ready your place of business for a site visit by a lender.
4) Be able to defend all projections with valid and compelling data.
5) If possible limit capital expenditures as they will be difficult to recover.
6) After your corporate tax return is complete, you or your accounting professional should reconcile your internal financials to your tax return. In many cases this can be completed with just a few journal entries.
Finally have realistic expectations of value. Hiring the advisor with the highest valuation may seem like the right approach, but it will often lead to frustration and wasted time. Choose your broker carefully and obtain a detailed and written valuation.
And finally, be prepared to explain everything to a naturally skeptical buyer & banker. A good broker will advise you on all of these points, as credibility is everything once due diligence begins.