Business Broker SBA Guidelines for 2014

What are buy/sell financing options that are working in todays economy?

Cash Flow Requirements:

1) Cash Flow Coverages

1.15 to 1 debt service coverage ratio required for any loans greater than $350,000.
1.1 to 1.0 debt service coverage ratio required for any loans less than or equal to $350,000 PLUS 1.0 to 1.0 coverage on a global basis is also required.

2) Addbacks

Only standard add backs, including documentation to support anything not specifically identified (i.e. W2’s to support salaries other than what is shown on the Officer Compensation line; other evidence to support unnecessary vehicle expenses on the automobile line time, etc.).

The government may be willing to finance up to 90% of the sale in 2014.

Structure

1) Defining the Buyer

In an asset purchase, the buyer should be a new entity (not an individual).
In a stock purchase, the buyer may be an individual, but the small business being acquired must be a co-borrower

2) Seller Notes

A seller note for 10% to 20% s hold be negotiated up front.
Seller note term should be 7-10 years. including standby period. Shorter terms may be acceptable, but a balloon payment should not be required.
Seller note may be required to be on fully standby for up to 2 years if
1. The seller note is needed to meet the 25% equity injection requirement or 2. Other weaknesses in the credit requests exist.
2. Other weaknesses in the credit request exist.

Valuations

1) Business Valuations

An independent third party valuation ordered by the bank is required when the amount of the financing (including seller financing) minus the appraised value of real estate and/or equipment being financed exceeds $250,000

2) Equipment Variations

An independent equipment valuation may be required to determine collateral coverage when acquisitions include a large amount of fixed assets and those assets have been significantly depreciated

3) Real Estate Appraisals

An independent commercial real estate appraisal ordered by the bank is required when the amount of the SBA-guaranteed loan is greater than $250,000 and is collateralized by commercial real property.