What are buy/sell financing options that are working in todays economy?
Business Acquisition Lending
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.
- 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.
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
- The seller note is needed to meet the 25% equity injection requirement or 2. Other weaknesses in the credit requests exist.
- Other weaknesses in the credit request exist.
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.