The business acquisition lending environment is changing. Some lenders have already dramatically tightened their lending ratios. Other banks have not done so yet but are moving in that direction.
Things are so in flux that some deals can be derailed midstream because the banks make changes overnight. Homes are often used as collateral for deals and the banks are also having trouble valuing them in the current housing market.
What does this mean if you are buying or selling? Everyone will need to have a little more patience and be more flexible and seller financing will now play a much bigger role than in recent years.
Here are some tips about Business financing:
Important factors buyers should know about business purchase financing before beginning their search
1. Down payment. Business purchase financing almost always requires 10% - 30% cash equity from the buyer. A seller's note may be counted as a part of the down payment but the buyer will still need at least 10% - 15% cash to invest. The buyer can use home equity, pensions, IRAs etc. for down payments.
2. Credit. Buyers need to have excellent credit. Any negative credit history at all will be a problem. A very detailed personal financial history form must be completed and approved by the SBA. If you are married the SBA will also look at the credit of your spouse. If your credit is less than above average you may be able to get approved with non-spouse, co-signer.
3. Experience of the Buyer. For business purchase financing to be secured banks and the SBA will look at the experience of the buyer to gauge the degree of risk involved. If a business is highly technical or require significant expertise then the buyer will probably need that on their resume. For less complicated businesses, any sort of business leadership experience is very helpful. Buyers would be smart to have a resume prepared that documents past business operation experience. (Any, however insignificant, is better than none)
4. Interest rate. The rates are negotiable and it is advisable to shop the market. SBA loans are limited to 2.25% above the prime rate in the Wall Street Journal for loans with maturities of less than 7 years, and limited 2.75% with maturities of 7 years or more. As of this writing, Feb 2008, the WSJ prime rate is down to 6% from 7.25% only a month ago and 8.25% a year ago. Great news if you want to purchase a business. (6+2.25= 8.25%)
5. Term of Loan. Varies by bank. Many banks advertise up to 25 years for SBA loans. This is usually for a SBA loan that involves Real Estate. Straight business purchase financing is usually 7-15 years.
6. The discretionary earnings for the business should cover the debt and provide the buyer with a reasonable income. (Another reason that your personal financial history is required) Banks are realistic, you need to pay your bills. Alternative sources of income helps - spousal, investment, rental, etc.
7. Seller involvement. If the seller is involved with the business post sale and has a stake in the outcome that reduces the risk to the bank. Small seller's notes are often needed and the seller may be required to continue to work in the business for an extended period of time.
8. Will you have to put up your home? Debt for business purchase financing often times, must be secured with real estate. (Home or otherwise) Yet this may depend on the bank and the overall strength of the deal. For example, if a buyer comes in with a sizable down payment then he or she may not have to use property as collateral. But if the buyer is highly leveraged then he or she will probably need to secure part of the debt with real estate.
Because of the current housing market and declining home prices, banks are becoming more conservative with business purchase financing. Seller's notes will most likely play a much larger role in these transactions for the near future. (Feb. 2008)
9. Personnel. It is very important that the staff, employees & management, stay in place. Banks may require agreements that note who is staying. This is not usually a problem since people usually want to keep their job.
10. Working capital. Some businesses require a large amount of working capital. Banks will look at what kinds of terms the business is on with it's customers and the size of accounts receivable to determine how much working capital a buyer will need. Some banks will finance some or all of the working capital but this will increase the total loan amount.
The complete article can be found here.
Asking Price: $425,000
Discretionary Earnings: $182,000
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American Car Performance Center
Location: Ontario - 15 Freeway Frontage!
Asking Price: $500,000
Discretionary Earnings: $240,561
For more information: Please Go to my Listings
Seeking Interest for these businesses:
Plastic injection molding Company, San Gabriel Valley
Juice in Up Franchise, Los Angeles
Calibration Service Company, Inland Empire
Restaurant Equipment Sales and Service, Orange County
Furniture importer, Manufacturer, San Fernando Valley
Skateboard Manufacturing, Los Angeles
These are businesses in the pre-listing/valuation phase. Once listed we contact interested parties prior to executing our marketing plan. Please Contact me
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Ron Van Orden
VR Business Brokers, Pasadena, CA