For a seller to receive all cash (or mostly cash) when the business is sold, the transaction will most likely need to qualify for an SBA-guaranteed loan. The following are factors that should be considered when establishing the price point to ask for your business and have it qualify.
- The seller will want the price to be as high as possible, based on the published seller discretionary cash-flow (SDCF) of the business, but not so high that a potential buyer won’t even call.
- The price should not be so high that the business will not qualify for a long-term SBA-guaranteed loan. Based on the normal cash injection range, which is typically 25% of the project total with a 10-year amortization; at 2.75% over the WSJ prime rate. The cash-flow of the business must be able to repay the loan, pay a salary to the potential buyer that will cover his lifestyle, and retain enough profit for 25% of the annual debt service in additional profit. This is called the debt coverage ratio, and it must be 1.25%.
- Your intermediary/business broker needs to understand the lender and SBA requirements of what can and cannot be added to EBITDA (earnings before interest, taxes, depreciation, and amortization), which becomes SDCF and forms the basis to enable repayment the loan and paying the buyer’s salary from the lender’s perspective.
- Your intermediary/business broker should have an established relationship with a SBA loan broker who works only with national Preferred SBA Lenders, which assures knowing which of these lenders are making loans, what they are looking for, and how they want to see the transaction presented.
- It is important to, very early in the sales process, be working with an Intermediary/business broker who can establish the cash required for the cash injection that is required to qualify for the SBA-guaranteed loan; and the amount of income the business needs to produce to meet the potential buyer’s living standards. Without this information, everyone involved stands to waste a lot of time, as well as become very frustrated.
- This is all related to establishing a realistic price point for selling the business, and getting the transaction financed.
- These factors are less of an issue when the business being sold has SDCF of over $900,000 and the target buyers are private equity companies or small investment groups.
At Dolan Sales, we have been working with the same SBA loan broker for more than 15 years. During this time, the loan broker has never let us down. This loan broker was getting transactions funded during the recent great financial meltdown, when it was widely thought that business loans were not available.
(c) 2013 Dolan Sales, Inc.