by Greg Caruso | Feb 22, 2022 | SBA Business Valuation and Appraisal
A key to buying 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.
- Complete a full SBA Loan Application
- Obtain all other required documentation. Click here for an SBA 7(a) Loan Program list
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.
by Greg Caruso | Jun 16, 2021 | SBA Business Valuation and Appraisal
In addition to regular SBA 7a loans and SBA funding, businesses have been able to ask for additional funding through programs like the Paycheck Protection Program (PPP), the Restaurant Revitalization Fund, and Shuttered Venues Grant. Applications for the PPP closed on May 31 and slow rollouts of the SVG, The Wall Street Journal recently asked, “What is it small businesses actually want from the SBA?” And spoke to advocates, business owners, and the SBA about what the post-pandemic assistance will look like.
Below are the major points answering what entrepreneurs want from the SBA, or you can read The Wall Street Journal’s full article here.
Protect and Rebuild Businesses
Scott Gerber, CEO of the Community Company, told the WSJ, “Strategies might include expanding the agency’s outreach efforts to smaller, newer businesses, as well as giving more support to businesses in minority, rural and disenfranchised communities.” In response, the SBA says they are “designing pandemic-relief programs focused on businesses that are most in need.”
Provide Access to Capital
Traditional SBA loans look at credit scores, and if businesses failed to pay rent or other loans during the pandemic because they didn’t have the revenue, their credit scores have been negatively impacted and they might not be able to get loans. Small business advocates say that the SBA should relax rules for the loans, make sure the information on how to get loans is clear, and help businesses understand what they are eligible for.
Be More Inclusive
We all heard the stories at the beginning of the pandemic about who was and wasn’t getting PPP loans. Similarly, advocates are now pointing out that the SBA should “connect with small businesses that have historically been left behind.”
by Greg Caruso | Apr 29, 2021 | Exit Planning Business Valuation & Growing Business Value
If you are buying or selling, or adding or removing a partner from a business partnership, you may know that the business needs to be valued. In very generic terms, this means creating a financial model of your business and estimating a value. Business evaluators use three business valuation approaches to value different businesses. But how do you know which valuation approach is best for your small business?
Here are the basics on the 3 approaches to business valuation, and which businesses they work best for.
The market approach uses substitution of market sales.
The market approach is the primary way to value small and very small businesses. The valuator will substitute comparable market sales from similar companies that have recently been sold to the company being valued. This calculation includes comparing cash flows and financial information with information about how the company is structured, the industry, and overall economy. For example, if a small government services provider is looking to determine their value for the SBA, a valuator would compare their size, management team, cash flow, and financials to a group similarly sized business in the same industry. For more information on this approach click here.
An income approach is based on cash flow.
When valuators use the income approach to find the value of a small business, they focus primarily on cash flow. The income approaches estimate the business value to an investor who could invest in anything from a government bond to a small business. This means looking at how much money a business is making and the business risk compared to other investment risks. Because most people who are buying or selling a business are interested in knowing how this business compares to other businesses this approach is the most used approach. By looking at the historic cash flow and income of a business along with many other business factors, valuators estimate future cash flow and the risk of obtaining the cash flow. From those inputs, they can estimate a value. For more information click to ….
The asset approach estimates the business’s value through assets.
For some small businesses, their value may lie in the assets they have. For a construction company, this could include equipment; for a commercial real estate company, it could include their properties; and for a tech company, it could include intellectual property. The asset approach is often used when there is not sufficient cash flow to use the income or market approach and basing the value on cash flow would not adequately estimate the value of a business. For more information on this approach click here.
The reality is that a professional valuator looks at your small business and all the available information, and uses the approach (or combination of approaches) best suited for your business. Each of these three models can be useful and each can be used in a misleading way. This is why all the models are helpful but none are perfect. As valuators, we impartially use valuation models to help business owners understand their value, whether it is for an SBA 7(a) loan approval, dissolution of the business, or establishing a partnership.
Valuation is not a strict science, but also an art, where we create the best possible comparison for your business to understand it’s value. To find out more which valuation approach is best for your business, contact me to learn more about our business valuation services.
