The tightened credit market and slow economy that the United States has experienced over the last two to three years has caused a modification in the loan criteria for many traditional lenders resulting in a restriction of financing available to fund business acquisitions. Securing financing for the purchase of an established business is one of the most important components of the deal and for many buyers the process in locating the right funding option can be both daunting and challenging. Despite the national economic headlines, there remain a number of acquisition financing sources that are actively lending money for these deals. The size of the business, amount of financing required, business cash flow, quantity-quality-type of assets, business experience, and credit worthiness will all be issues that determine the type of funding as well as the particular financial companies that should be evaluated. SBA financing, with its 7a Loan Program, remains one of the most popular and frequently used vehicles for funding acquisitions. What most entrepreneurs are unaware of is the fact that every financial institution involved with SBA financing will have its own unique and distinct lending criteria. Keep in mind that the SBA is just the loan guarantor not the actual lender. Therefore it is critical for the buyer to speak to a number of financial institutions, or consult an experienced business broker, to determine which sources of capital are available and the most appropriate for the particular business acquisition.
As illustrated above, the finance company that is involved plays a crucial role given that the majority of main street business acquisitions involve 3rd party funding. As a result, a business owner interested in selling the company should recognize the importance of ‘pre-qualifying’ their business for financing. Involving the lender early in the process avoids delays in addition to determining the optimal framework for the transaction financing structure. “Owners seeking to sell who consult 3rd party lenders benefit from becoming well educated on the type of financing and terms that are available, the likely buyer down payment required for the loan and any seller financing commitments that might be required,” commented Steve Mariani, President of Diamond Financial Services. Companies for sale that are distinguished as ‘lender pre-qualified’ will receive a better response, increase its marketability, and often decrease the time required to close the transaction. Prospective business buyers should also pursue a buyer ‘prequalification’ early in the search process as immeasurable benefits can be obtained. Understanding in advance about the value (or price) of a company that they can qualify for will make the buyer a significantly more attractive prospect to both the business broker and the seller. Buyer ‘pre-qual’ letters, while generally available at no cost, often prove to be priceless in the perceived buyer qualification. In summary, both the business seller and the business buyer are strongly encouraged to consult financing companies early in the process so that they have a clear understanding of the types of financing that are available in addition to the terms and conditions for which it would be extended, based upon the specifics of the individual business and participants.