Financing the Sale of Your Business – Part II
Last time we discussed the fact that since the Great Recession, commercial banks have become asset-based lenders. This is a negative development to the business seller since most business sales require a buyer to pay a premium over asset value. Sellers correctly expect to be compensated in the purchase price for goodwill, also referred to as enterprise value and unflatteringly as blue sky or air ball.
If the combination of an asset-based bank loan, buyer cash, and seller paper does not cover the contemplated sales price, how can a sale be consummated? Enter the SBA. The Small Business Administration is a quasi-government agency which guarantees buyer bank loans that are based on the cash flow of the business (something commercial banks cannot do without SBA support) and/or on the assets included in the sale.
The SBA guarantees 75% to 90% of the loan value on business loans banks issue for purchasing businesses. Such loans are underwritten and administered by commercial banks. While all banks have access to the SBA, certain banks are SBA-preferred lenders which means that such banks are authorized to do the underwriting locally (i.e., they do not have to send the loan package to Washington DC for approval.) Using an SBA-preferred lender avoids what is often a slow and arduous bureaucratic road to final loan approval.
Those unfamiliar with the SBA process initially cringe at the thought of dealing with the government, incorrectly assuming that it is painful and cumbersome. In recent years, the SBA has streamlined and shortened the process when the borrower uses a preferred lender. In fact, it is usually easier and faster to get an SBA loan through a preferred lender than a non-SBA traditional commercial loan.
The fees for SBA loans are greater than fees for most commercial loans; however, such fees are added to the loan package thereby allowing the business buyer to conserve valuable cash at the transaction’s closing. In recent years, commercial banks have increased sharply their origination fees so the fee gap between SBA loans and commercial loans has shrunk. In addition, SBA loans usually are floated for longer terms than commercial loans which minimize buyer monthly payments thereby reducing the likelihood of the business buyer encountering cash flow problems.
So, when discussing a possible sale of your business with a prospective buyer, it would be prudent to make sure that the buyer intends to work with a bank with preferred SBA status for the banking component of the financial package for the intended purchase of your business..
Contributed by Michael Greengard, Praxis Business Brokers.