When applying for an SBA loan, buyers often face the challenge of meeting bank requirements for financial statements while also addressing sellers’ demands for proof of funds. Here’s a clear guide on how to navigate this situation efficiently.
SBA Loan Financial Statement Requirements
Banks require detailed financial documents from the seller to evaluate the viability of a business for an SBA loan. These documents include income statements, balance sheets, and tax returns. Lenders use this information to assess the business’s cash flow, profitability, and overall financial health before granting an SBA loan or conventional loan. However, some sellers may refuse to provide these documents until they see proof of funds from the buyer. This creates a problem because lenders won’t underwrite SBA loans without the necessary financial data.
Buyers facing this situation have several options:
Requesting high-level financial data: Buyers can ask sellers for a summary of financial information, such as annual revenues and profits over the past few years. This allows the buyer and SBA lender to make a tentative assessment of the business’s financing viability.
Providing a personal financial statement (PFS): Some sellers may require the buyer to provide a PFS, which outlines the buyer’s personal net worth (assets minus liabilities). This helps the seller evaluate whether the buyer can provide the necessary cash to close the transaction. The SBA lender will also require a PFS from all owners of 20% or more of the company, so buyers should be prepared to provide this (SBA Form 413) regardless of the seller’s request.
Using a mutual non-disclosure agreement (NDA): An NDA is typically signed before the sensitive financial information of either party is disclosed, ensuring confidentiality.
Engaging with an SBA Lender Early
Many buyers prefer to engage an SBA lender early in the process, either before approaching the seller or after encountering resistance regarding the release of financial documents. Buyers can use tools like the SBA Lender Match to connect with preferred lenders who have extensive experience in business acquisitions.
During initial conversations with an SBA lender, the buyer should expect questions about:
1. The business’s cash flow.
2. The buyer’s ability to inject 10% to 25% of the purchase price into the deal.
3. The buyer’s qualifications, including industry experience and readiness to work in the acquired business.
Buyers who have already had preliminary discussions with a lender are more likely to obtain the necessary financial documents from the seller than those who have no financing plan in place.
Debunking the SBA Loan Timeline Myth
A common misconception is that SBA loans take too long to close. This is often not the case when working with a preferred SBA lender who has significant mergers and acquisitions experience. A preferred lender can close a transaction within 30 to 45 days of having a “full file” (i.e., all required documents). The biggest delays usually come from slow responses by the seller or buyer, not the lender.
To expedite the process, the buyer, seller, broker, and banker must work together to provide all the necessary information. Non-preferred lenders, who may lack SBA lending experience, often face longer timelines because they must send everything to the SBA for approval, which can result in “screen outs.” This happens when the SBA sends the application back for missing information or clarity. Through the SBA Lender Match tool, borrowers are connected only with preferred SBA lenders, helping to avoid these delays.
Building Rapport with Brokers
Establishing a good relationship with the business broker or investment banker representing the seller is essential for obtaining financial disclosures. Brokers only get paid if the business sells, so they are motivated to ensure the buyer has the necessary experience and financial resources to close the deal.
It’s important to distinguish between good brokers and bad brokers:
Good brokers: These are full-time professionals who vet their opportunities carefully, only representing viable businesses that are likely to be acquired. They often handle a handful to a dozen deals per year and focus on businesses that can be leveraged (i.e., where a substantial portion of the purchase price can be financed).
Bad brokers: These are often part-timers who treat business brokerage as a side hustle. They tend to represent lower-quality deals and may lack the experience needed to facilitate smooth transactions.
When vetting a broker, consider asking the following questions:
1. How many transactions do you handle each year?
2. What is the average deal size?
3. What industries do you specialize in?
4. Is business brokerage your full-time job or a side hustle?
By working with a qualified broker and a preferred SBA lender, buyers can streamline the acquisition process and increase their chances of closing a successful deal.