4 min read · Business Buyers
The answer first. The best time to find out a deal will not finance is before you make the offer. Once you sign, changing the price is harder.
Invert it: what makes the lender say no?
- ◆Making the offer before running the numbers.
- ◆Trusting cash flow that is not on the tax returns. Lenders size on what is filed.
- ◆Forgetting your own pay. If you replace the owner, your salary comes out of the same cash flow.
- ◆Putting every dollar into the down payment, leaving no cushion after closing.
- ◆Assuming seller financing counts as your own cash in. SBA has specific rules on that, so ask first.
The three pieces
A purchase is usually built from three pieces. Your cash in. A loan. And, sometimes, a note from the seller, which keeps the seller invested in the business doing well. Each piece has to fit the other two.
Five numbers decide the deal
- 1
The price
What you agree to pay.
- 2
Your cash in
What you bring, and where it comes from.
- 3
The loan
The price minus your cash in.
- 4
The monthly payment
It depends on the term and on a rate that may float.
- 5
The cash flow the business earns
It has to cover the payment with room to spare.
(Hypothetical, round numbers.) A business is priced at $1,000,000. You bring part of the price in cash and borrow the rest. The payment on that loan comes to a yearly total. The seller's filed tax returns have to show enough cash flow to cover that yearly total, plus a cushion, plus your own pay if you are stepping in as the operator. If they do not, the price or the terms have to change. The lender will not.
What the lender wants to see
- ◆The seller's business tax returns, usually the last three years.
- ◆This year's profit and loss and balance sheet.
- ◆Your own tax returns and a personal financial statement.
- ◆Your résumé and your experience in the industry, or a team that has it.
- ◆A letter of intent or purchase agreement.
- ◆Proof of where your cash in comes from.
An owner who holds a meaningful share generally signs a personal guarantee on an SBA loan. Know that before you start and talk to your partners.
A quick self-check
- ◆I have the seller's last three years of business tax returns.
- ◆I know where my cash in comes from.
- ◆I know this industry, or I have a team that does.
- ◆I have not signed a final purchase agreement.
The plain version
Run the five numbers first, use the seller's filed returns, and keep a cushion after closing. This tests whether a price can be financed. It is not a valuation. We are a broker, not a lender, and the lender decides.
Run the numbers
Free, no credit pull, no obligation. See the math before you talk to anyone.