Having completed transactions totaling nearly a half billion dollars, our team has worked with many sellers that were not aware the price they receive for the sale of their business may depend as much on whether the buyer can finance the transaction as it does on their business’s financial performance. A great business with inaccurate or incomplete information is a difficult business to finance. And a business that cannot be financed can be very difficult to sell.
Most business sales today involve some form of financing — an SBA loan, a bank loan, or the seller carrying a seller note. Industry data shows some form of financing is involved in as much as 90% of all small business transactions. Lenders, sellers, and buyers alike ask the same question — can the business comfortably cover the debt service and pay a living wage? The following explains how to make sure the business answers "yes":
- Get Financials Lender-Ready Now - Lenders require three years clean, consistent tax returns and financial statements to assess if the business is financeable. Numbers that do not match across documents, outdated statements, or commingled personal expenses are the fastest way to stall — or kill — the ability to obtain lender financing. Financials should be cleaned up before listing the business for sale.
- Offer Seller Financing - Most lenders require some level of seller financing to ensure the seller has skin in the game and remains motivated to assist the buyer in transitioning the business. A seller’s willingness to carry a seller note also signals confidence in the business. Additionally, transactions that include seller financing and an SBA or bank loan tend to sell for meaningfully more than all-cash transactions, often 15% to 20% higher. This is due to offering greater financing flexibility that expands the buyer pool and reduces the buyer’s and lender’s risk.
- Document Every Add-Back - Lenders normalize the cash flow by adding back seller perks, one-time expenses, and discretionary spending to find the true seller benefit. If the add-backs are not documented and defensible, a lender will not credit them — and the business will look like it earns less than it does. Documenting add-backs speeds up financing and optimizes pricing.
- Know Debt Service Coverage Ratio and Living Wage - Most lenders want to see cash flow covering the new loan payment by 1.35x or more. A buyer will also determine if the business can provide a reasonable living wage and an adequate return on their initial investment. Knowing these before selling allows time to address issues beforehand.
- Reduce Seller Dependence - Lenders perceive businesses that rely heavily on the sellers to operate as risky collateral. Seller dependence can be reduced by cross training team members, hiring or developing a general manager, as well as documenting standard operating procedures to help ensure operations do not collapse the day the seller walks out the door.
- Keep Clean Debt Schedule - Lenders require a clear picture of all existing business liabilities — loans, leases, and lines of credit — with balances, terms, and rates. An organized debt schedule speeds up underwriting considerably.
- Work With a Business Broker - Brokers are well versed in assisting and identifying areas that need to be optimized prior to submitting to a lender as well as knowing how to document and package the business for a lender's underwriter.
The Bottom Line
A financing friendly business often sells faster, for more money, and with less lenders backing out at the last minute. The seven steps above are not overly complicated, but they take time to implement. Working with a business broker can help streamline the process.
Contact Eric J. Gall at 239.738.6227 or [email protected] for a complimentary, confidential consultation.
Contact Eric J. Gall at 239.738.6227 or [email protected] for a complimentary, confidential consultation.
