Get more business for your buck!
The value of an SBA pre-qualified business.
How you can spend less and buy the best.
by Brian Stephens – Legacy Venture Group & BuyBizUSA
Many of the very best businesses require the least money down. If you can find that rare business that qualifies for an SBA loan and the bank likes your credit and background, you can leverage some excellent business acquisitions. Most businesses won’t qualify and some industries, especially ones with lots of cash, seldom get approved, but there are still plenty of great businesses for sale in many different industries that are SBA pre-qualified, especially if you know what to look for.
Good news! Banks are willing to finance some of the best business on the market. Banks are starting to make more and more SBA loans. That means you can get a great business for 20% down and sometimes for less than that. The trick is sifting through the mass of business for sale to find those rare gems that qualify. There are strict rules that determine whether a business can be financed by a bank with support of the Small Business Administration, as described on the SBA website (see https://www.sba.gov/loanprograms).
More Biz for your Buck. Consider the example highlighted in the graph below. Imagine a business that annually grosses $1,000,000 (a) in sales and nets $100,000 (b) to the owner. The market is seeing business like this one sell for about 2.5 (c) times the net. You and the seller agree to a price of $250,000 (d). You could just pay $250,000 out of your savings or ask for some seller financing, but if the business has the right records you might be able to get an SBA loan for only 20% down. That means that you would only have to come up with $50,000 (e) plus closing costs. At a 6% interest rate for 10 years, the annual payments would be $26,644.92 (f), leaving $73,355.08 (g) the if the business nets $100,000 again. In a sense the Buyer would be gaining over $73K each year for 10 years for essentially $50,000 out of pocket as opposed to $100,000 for $250,000. See chart below.
|Gross Sales||$ 1,000,000.00||a|
|Owner Benefit / SDE||$ 100,000.00||b|
|Down Payment||$ 50,000.00||e|
|Net after Payment||$ 73,355.08||g|
|Ratio of Payment to Net||1.5||h|
Only the best businesses qualify. On a recent study of well of over 3,000 businesses for sale, just over 200 or approx 6% were “prequalified” for an SBA loan. Few businesses have the records, the earnings, the direction of sales and other characteristics that allow a bank to make a loan. Among other criteria, a business must demonstrate compelling evidence that it generates enough profit to pay back the loan and generate a reasonable income for the business buyer. A business with poor records, hidden profits and tax avoidance costs buyers more out of pocket because banks are reluctant to provide loans to acquire them.
One percent of restaurants pre-qualified! On a recent survey of over 700 restaurants for sale, only 7 were available as pre-qualified for an SBA loan – less than one percent. A few months back, one of our Clients looked at a restaurant that was advertised for only 10% but after making an offer, our research showed that the bank wanted at least 20% and was pushing for 25% down. Be careful of what you see advertised! On the positive side, we helped a Buyer acquire a restaurant and bar by identifying the right bank and collecting the right financial documents. Much credit is due to the Seller for maintaining amazing tax records which allowed the business to sell for top dollar and only 20% down for the Buyer. We recently had a follow up meeting with that Seller who shared that revenues were growing monthly and that profits were up significantly.
How does one find an SBA financeable business? Start by looking for ones that advertise “SBA Prequalified”. Note: prequalified to not mean preapproved; there is a big difference and some advertisers don’t understand that. Not everything advertised as pre-qualified actually gets a loan but finding ones the have been pre-qualified is a good start. Also look for businesses that are priced attractively, have enough profit to pay off a bank loan, and have tax-represented figures. A good Business Buyer Advocate can usually run a business search with the right criteria.
Less that 18% of businesses advertised for sale on the internet use gross sales and net to owner claims that were taken their tax returns. Each quarter our firm runs a survey and the last results showed 17.6% of the businesses advertised used tax return figures to cited their advertised earnings. That is up from 16.1% for the first quarter of this year. You can also look for businesses that have represented their advertised figures from a Profit and Loss statement (P&Ls). While not as compelling as excellent tax returns, banks often consider good P&Ls are in the approval process.
Where do Seller’s get the reported earnings if they don’t take the figures from the tax returns? About a fourth of all businesses for sale use figures from from Profit and Loss Statements. The rest advertise Gross Sales and Owner Benefit figures based on calculations such as ‘Owner To Prove’ (I won’t tell Uncle Sam the truth but you can trust me), ‘Owner Estimate’ (I guess this seems like it might be a good number)., and ‘Pro Forma’ (we had a good January so I am sure the whole year will be much better than prior years). These figures do not encourage the banks approve business loans. Banks seek Tax Returns and verified Profit and Loss statements.
One more benefit of buying a business that qualifies for an SBA loan is that you have the bank’s team of professionals also scrutinizing the business you are buying. Their team will carefully analyze the value of the business. They even request an independent business valuation. Remember, there is always risk in business, but you have a better chance of minimizing risk when you have the support an experienced team of professionals. And you have better purchasing leverage when you have the option by acquire the business for only 20% down.
Good luck in your quest to find the right business. Remember to do your research and make sure you have someone with experience on your side. Remember to “Buy based on potential, buy pay based on performance”. If you need help finding that right business secure the help of an experienced Business Buyer Advocate who can help you through the process.