While most sellers would prefer all cash at the close of the transaction, this will generally result in a smaller pool of buyers and a lower sale price than if financing is available, either via bank financing or a Seller note. Most buyers want to work with other people’s money and will be looking to invest as little of there their own money as possible.
As part of our initial evaluation, we always review the financials to determineif the deal can be financed from institutional lenders (banks). This is often the most desired outcome for the seller and marketing the business as one that has potential financing in-place, enhances the business in the buyer’s eyes.
Typically, small business deals are financed at least partially by the SBA program. The SBA will finance up to $5,000,000 to eligible business acquisitions, with a term of 10 to 25 years for goodwill and Real Estate acquisitions. We perform a full underwriting of each of our deals to determinethe maximum financing possible for each of our deals. We also submit this package to lenders we work with to gauge their interest. The availability of potential funding strengthens the deal and reinforces the business valuation.
In performing any business evaluation it is necessary to “normalize” the results, adding back non-business related income & expenses; e.g., if the business also owns the RE and is paying an above market rent, we would properly adjust (addback excess rent) the rent expense. There are a number of other addbacks that owners may utilize that institutional lenders will not accept; e.g., personal expenses buried within another category on the tax return. We are knowledgeable of what they will accept and present our submittal with a clear explanation of all addbacks to assure that we can obtain the maximum amount of financing.
Some deals will justify a higher valuation with the seller acting as the bank (seller financing). In the event that the financials will not provide sufficient support to obtain bank financing, we will advise the owner of his options; he can either accept a lower all-cash valuation, or provide seller financing. We will discuss the deal with the seller to evaluate how much he would be willingto fund, for how many years and at what rate. We will review the options andpresent various scenarios (price, down payment, term & rate) to the seller for his review, showing the deal from the buyer’s perspective (*ROI, ROIC, DSC).
The most marketable deals are those that offer funding for the buyer to complete the transaction. Financing supports the asking price and increases the pool of potential buyers. Seller financing shows that the seller stands behind his addbacks and that he has confidence in the deal.
*ROI: Return on Investment
ROIC: Return on Invested Capital
DSC: Debt Servie Coverage