A key tobuying or selling a business is the ability of the buyer to obtain the money for the business acquisition. Many business purchases or business acquisitions will be financed by a Small Business Administration, SBA 7(a) loan. Here are the major steps to obtain SBA 7(a) financing for purchasing a business and several great resources if you wish to learn more.
Pull together your financial statement. Here is a link to an SBA Financial Statement Form to use
Gather 3 years of your personal and if you own a business, business tax returns.
If married, talk to your spouse. In most cases they will have to co-sign the loan. If they are not willing to do this bring this up early with the bank. It may prevent you from obtaining a loan.
You may want to get per-qualified from a bank. The banker will look at your information and help you understand the size business that is realistic for you to finance. In all cases the financials of the business will impact and may change this preliminary analysis.
Obtain any other information requested by the bank loan officer packaging the Small Business Administration loan. There are likely to be many necessary documents.
Next, armed with some idea of the loan you are qualified to get go out and find a business to buy. This is a process. Figure it is likely to take six to nine months and will be a lot of work. Once you identify a business you want negotiate a letter of intent (LOI) with the Seller. A LOI is a preliminary outline of the business terms that your business purchase will be based on. Armed with the LOI go back to your SBA loan officer and….
Provide the letter of intent to the SBA loan officer
Provide three years Tax Returns for the Selling Business
Prepare a forecast and business plan for the next three years for the business finances.
Once you have made a full application with the SBA lender for the SBA small business loan there will be many other things for you to do.
The lender will obtain an SBA Business Appraisal or SBA Business Valuation. This business appraisal confirms that you are paying within the range of Fair Market Value for the business. It means the price you are paying is within the range of a fair deal. It does not mean you are getting a great deal.
Do your own due diligence. Hire an accountant to go through the books and records and tie cash to the banks and source documents and a check basis. Check out the condition of assets, talk to key people, talk to suppliers, etc. Make sure you are buying what you think you are buying.
If you have a letter of intent negotiate the full Binding Purchase Agreement. Make sure you hire an attorney that is familiar with business transactions in the state you are in.
When the day comes, go to closing……Congratulations on your new business and new SBA (7(a) business acquisition loan.
SBA 7(a) and other SBA programs provide a huge source of debt funding to increase your leverage or buying power. For most individuals buying a small business the 7(a) program is the only source of debt funding. The SBA makes loan guarantees to banks for qualifying buyers and businesses that reduces the bank risk to a level where the banks can lend. For details see – SBA, Buy an Existing Business or Franchise https://www.sba.gov/business-guide/plan-your-business/buy-existing-business-or-franchise and How to Finance an Acquisition Using an SBA Loan https://www.entrepreneur.com/article/358292
In some situations there are other forms of financing. For instance some businesses can be purchased with Asset Financing such as loans secured by Accounts Receivable or Real Estate financing. Other, extremely stable businesses like medical and dental practices may be purchased with conventional financing. For multiple possibilities see US Chamber of Commerce, How to finance a business acquisition: https://www.uschamber.com/co/run/business-financing/financing-buying-an-existing-business and CNBC, Secure financing with these 9 types of small business loans https://www.cnbc.com/select/small-business-loan-types/.
The Art of Business Valuation and Harvest Business, LLC have performed 100’s of business valuations for SBA 7(a) purposes and directly for buyers and sellers who want to know the value of the business they are buying or selling. If you have any questions please send us an email today.
The following are quotes related to small business valuation, business owner succession or exit planning, business brokerage, SBA and more from “The Art of Business Valuation, Accurately Valuing a Small Business,” by Gregory R. Caruso, published by Wiley, 2020, ISBN: 978-1-119-60599-7
You are authorized to use these quotes by providing the following reference to the book, Caruso, Gregory, “The Art of Business Valuation, Accurately Valuing a Small Business”, 2020 Wiley, along with the page number. If there is not a page number, then it is just a quote of the author, Greg Caruso. If possible referencing this website www.theartofbusinessvaluation.com is always appreciated.
Micro and Small Business Valuation in the age of Covid-19
“Small business is under unbelievable stress from Covid-19 related economic issues varying from shut-downs to product shortages. Business valuation is based on future cash flows of the business. Micro and small businesses have a difficult time projecting cash flows in stable times which has become greatly magnified in the current environment. Yet outside a few “loser” industries and locations good businesses and good business people will preserver and create business value. As business valuators our job is to apply valuation basics along with professional judgment to properly assess business value and assist owners in growing that value particularly in times of uncertainty” Gregory Caruso, Author, “The Art of Business Valuation, Accurately Valuing a Small Business,” Wiley 2020
“How does one equate a large number of deaths, 10%+ unemployment, and a soaring stock market (at least as of August, 2020) when trying to predict the future cash flows of a small local business?” Yet this is what business valuation analysts do. The reliance on basic valuation principals augmented with professional judgement is how we value micro and small businesses in this environment. After all, business people will continue to need business valuations to buy, sell, get divorced, obtain loans etc. even in these uncertain times. Gregory Caruso, Author, “The Art of Business Valuation, Accurately Valuing a Small Business,” Wiley 2020
What creates errors in business valuation?
“Most major errors in business valuation are the result of missing facts or patterns and misinterpreting those facts or patterns, not from the improper application of the model. For instance, failing to factor in falling fuel prices into a bus company valuation that results in a very high valuation. P.26
Why is it hard to prepare a business valuation for Main Street, micro, and very small businesses?
“Small and very small businesses are just not very good at data collection, much less providing it to third parties. Most small business owners manage by walking around. In addition, the best owners have a few indicators that tell them where they stand; perhaps incoming orders and cash balance; perhaps today’s cost of goods. They have their one or two simple indicators and a feel for the business. This way owner/operators can run great businesses and keep overhead down. While this limits long-term growth, it creates significant overhead efficiencies. Consequentially, this lack of data makes economic and business sense.” P. 29
What is the Art of Business Valuation?
“No matter how complex a company or situation may seem while working through a valuation, when complete, the valuation analyst should be able to provide a concise and clear analysis. If the analyst cannot do that, then more work is needed. Being able to simplify is a major indication that you are achieving the Art of Business Valuation.” P.37
“Small businesses have less quantifiable financial data. Therefore, more reliance must be placed on qualitative, or soft data. This requires more professional judgment, hence, Art in performing a business valuation.” Gregory Caruso, Author, “The Art of Business Valuation, Accurately Valuing a Small Business,” Wiley 2020
Importance of business systems
““Quality business systems are when average people get extraordinary results every time.” Use this as the standard to determine systems. One indicator is if there are, “lots of reasons why things are not working,” generally, their systems do not work. P. 52
Importance of people to business value
“Does the business have a culture of: “forever and continuous improvement” or resiliency in the face of problems?” These two factors often are the biggest indicators of future success or failure. They also are cultural matters that may be hard to quantify.” P.55
Why is small business more risky than larger businesses?
“Concentrations kill. Concentrations are the main reason why small businesses are so much riskier than larger businesses. A large customer or supplier or other concentration can cause major disruption and bankruptcy when relationships end. Small and very small businesses have all sorts of concentrations. Many concentrations are unavoidable at least for periods of time. This include, customer concentrations, product concentration, supplier concentrations, referral concentrations, geographic concentration, key people concentration, commodities risk concentration.” P.60
Valuation Discounts, (Primarily Lack of Control and Marketability Discounts (DLOM))
“The purpose of a discount is to fully factor adjustments between the interest being valued (usually partial ownership) in the subject company and the comparables that are not fully accounted for elsewhere in the valuation model. Discounts are even more justified with small and very small companies due to the high levels of risk because of owner relationships, limited customers, limited suppliers, small geographic market, limited management depth, etc. These concentrations create volatility and risk that do not exist with larger companies and often are not fully accounted for in market data, capitalization rates, and discount rates.” P. 252
Exit Planning For Business Owners
“Many employees when asked, “Would you like to be an owner?” hear, “Would you like an upside bonus plan?” not personal guarantees and real ownership risk. This requires a clear and detailed conversation – early.”
“One area that could use more focus is the emotional side of the business exit and purchase process. Buying or selling a business is a major life change. It is stressful and difficult for most people. Numbers are easy compared to emotion and fear. Therefore, most people, even those who should know better, just avoid the topic.” P. 318
“Owners are sellers when their TIME is worth more than their MONEY. Most owners are not sellers because their business is how they want to spend their time. Their business is worth more to them than other potential owners. That is why business brokers are so concerned about what owners are going to do next. The void of time becomes bigger as closing gets closer.” P.324
What business buyers want
A “working model” to generate the cash flow. This means systems that work today. People who can operate the systems today who are staying after the sale.” P.325
“A very clear buyer adage is, “If you want to be paid for it, prove it.” In other words, buyers pay for what exists. An apple seed has the potential to be an apple tree. But no one pays for the tree when they are getting the seed.” P. 325
SBA 7(a) Business Loan Program
“Prior to the SBA most small transactions required the seller to finance as there was no one else…… This is rarely necessary with cash flowing businesses any more. In the last 25 years the SBA has removed these issues and brought stability to the market.
It appears that part of the reason why transaction sale data has become more useful is because there are more consistent transitions. In the end, most sellers take the SBA’s loan amount and the sale price is reasonably close to the loan amount. Few sellers want the risk associated with providing financing. The availability and stability of financing have brought predictability to the small and very small business sale market” p. 337
“Should the SBA program be restricted or if the terms for obtaining an SBA loan become very restrictive (for instance, requiring 35% down instead of the current 10% down), the value of small and very small businesses will be greatly impacted. This is yet another assumption underlying most small and very small business valuations that no one even thinks about.” P. 338
Business brokerage in the business sale process. How to maximize a price?
“The point of the business brokerage process is to make a market across the likely buyer pool for the business…… The goal is to get three or more LOI’s (Letters of Intent or preliminary offers) at about the same time to allow negotiating power on behalf of the seller and to verify the market….. Fear of loss brought on by multiple bidders is what creates negotiating power.” P. 345
“Businesses are selling current cash flow. Many a seller becomes so focused on the sales process that their profits fall, reducing value. A good business broker minimizes this distraction. After all, sellers need to run their businesses like they will never sell.” P. 350
Reviewing a Business Valuation
“Finally, does this make sense? Given the overall fact pattern, would someone pay a price that reasonably relates to the value found, based on the facts both specified and the reasonable assumptions with what was known or knowable on the valuation date?” p.394
The book, “The Art of Business Valuation, Accurately Valuing a Small Business” has over 400 pages covering many aspects of small business valuation and market sales including working with business brokers, increasing sales value, descriptions of a well-run sales process, due diligence including a checklist and guidance on SBA loans.
If you value or use valuations of businesses with revenues under $10 million, you need this book on your desk. The book published by Wiley is available through your favorite bookseller.
Finally the author, Greg Caruso, JD, CPA, CVA, is always available to assist with exit planning, brokerage, and to prepare or review business valuations with an emphasis on increasing value and likely transaction values and terms.
Greg is available for interviews, podcasts, quotes, presentations and more. Contact Greg at or 609-664-7955.
