Once you have established a fair market value for your business based on your local market, the next step is validating the price to meet SBA Loan Guarantee requirements. This is done in part by calculating what the total package will cost, including the buyer’s estimated legal fees, loan origination and bank fees, working capital, and other related start-up costs. From this project total, the amount of cash injection or the down payment required can be established to qualify potential buyers. The range of the cash injection is 20% to 25% of the project total.
The next step is to calculate the cash flow of the business after repayment of the loan and an estimated salary for the buyer. This is important to know in conjunction with the cash needed for the down payment. It becomes part of the qualifying process to ensure the business can repay the loan, and pay a reasonable salary to the buyer. The bank will look closely at the balance of profit after the loan payment and owner’s salary has been paid. The bank and the SBA will want to see 20% to 25% overage, compared to the debt service amount, which the bank terms as the debt coverage ratio of 1.25.
In today’s market, unless a buyer has such overwhelming financial strength that the bank can see that it will get its money from the borrower’s other assets no matter what, the bank will most likely require an SBA Guarantee to make the loan.
Having this information before going to market will ensure the business is priced to enable the seller to get all cash at closing and avoid wasting time with unqualified buyers.
Other qualifications of potential buyers are the borrower’s ability to purchase a term life policy in the amount of the SBA Guarantee, that they have no negative information on their credit reports, and are willing to use their homes as additional collateral.
Accomplishing these tasks without an intermediary or business broker could be challenging. Dolan Sales, Inc. has been working with an SBA loan broker for more than 15 years. This loan broker knows which of the national banks are lending and how they want to see the loan package to make it possible for the seller to get all cash at closing. Dolan Sales, Inc. serves customers nationwide and can be reached at 888-893-6661 for a confidential discussion on preparing your business to go to market with no upfront fees.
© 2013 Dolan Sales, Inc.