Learn How To Finance A Business Acquisition or Partner Buyout!

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The idea of “knowledge is power” is a recurring theme in my posts!? If you want to be a successful business banker and consistently meet & exceed your productions goals, you need to be well-informed about things that your prospects or clients are encountering in the marketplace.? Successful business bankers can confidently offer up insight on a wide range of topics.? Why is this important?? Referral sources and prospects will see you as a source of valuable information.? You will be able to build rapport with them and quickly convince them that you can help them either solve the problems they are experiencing or help them take advantage of some opportunity they believe will help them grow their business.

When a client or prospect approaches you with a business acquisition or partner buyout request, one of two things will happen.? You will either tell them that you can help them or not!? About the worst thing you do is say that you can’t help them and move on to the next prospect! If you have to say no, offer up an alternative solution.? The client or prospect will appreciate that you offered up the alternative solution, which means you can keep calling on them and win them back when their financial situation improves.? This also opens the opportunity to win over a new referral source.? You can call on the prospect’s CPA and talk about how you help them.? The alternative source will also appreciate the referral and will be motived to send referrals your way as well!

So, how do you finance a business acquisition or a partner buyout?? The most common way to do it is via the SBA 7(a) program.? If traditional lenders offer biz acquisition or partner buyouts, they typically provide 85% to 90% financing via the 7(a) program up to $5 million.? Non-traditional 7(a) lenders can offer up to 100% financing and are willing to be beyond $5 million in financing.? If you are not familiar with the SBA lending programs (SBA 504 & SBA 7(a)), check out the free Business Banker Development Program at www.bizpetrol.com.? The course teaches you everything you need to know about the SBA lending programs.? Your client or prospect may need a business plan.? If they do, tell them to google ?RAPID Business Plans.? Finally, your client or prospect will need business owner life insurance.? You can google The Baily Group which is now for providing the life insurance policies required by the SBA.?

Below are the basic eligibility requirements for SBA business acquisition or partner buyout financing!

SBA Eligibility Items:

• Must be a for profit business.
• Rolled equity is not allowed: i.e., a new entity formed in which seller would take stock/shares. A buyer requests that a seller take some sale proceeds and re-invest it back into the company.
• Earn-outs are not allowed (anything that increases the purchase price post-closing). What is allowed is a benchmarked seller note based on future performance based on current purchase price where seller note does not need to be repaid if targets are not hit.
• Buyer Rebates are allowed: Buyer rebates (i.e., seller proceeds held as escrow holdbacks tied to performance) that are released upon satisfactory business performance. While Seller Promissory Notes with performance-based covenants have always been allowed, this allows more flexibility on structure to make deals work. It is also a great tool to help mitigate specific risks such as concentration, employee retention, unproven growth trends, licensing considerations, supplier and customer transition, etc.
• Employee Stock Ownership Plans (ESOPs): Lenders that have delegated authority can now submit ESOP transactions. Additionally, loans to ESOPs for the purpose of purchasing a controlling interest (at least 51%) in the employer’s small business are not required to provide an equity injection.
• Franchises: Not all franchises are eligible for SBA financing. Still need to determine that the business qualifies for SBA financing.
• Loan Maturity & Amortization: Can blend maturities when there is CRE (commercial real estate) 25 years and non-CRE debt 10 years. Can offer 25-year term for both CRE and non-CRE when majority is CRE (51% more of the loan is for CRE). This can also be solved by leveraging SBA 504 & 7a programs.
• Partial Change of Ownership: SBA loans can now be used to fund the purchase of a portion of one or more owner’s interest in the business. Selling owner is allowed to “remain as an owner and involved in the day-to-day business, including as an officer, director, key employee, or employee.” ?Rolled equity from the target company into the new company for seller’s still remains ineligible. Ownership percentage is measured by the amount after closing. Ownership of 20% or more must guarantee. 100% financing is allowed if the business balance sheet for the most recently completed fiscal year and current quarter must reflect a debt to worth ratio of < 9:1 prior to the change of ownership. Otherwise, the borrower must contribute cash of at least 10% of the purchase price
• Partner Buyouts: 100% financing is allowed if the business balance sheet for the most recently completed fiscal year and current quarter must reflect debt to worth ratio of < 9:1 prior to the change of ownership. Remaining owners participate in operations and have the same or increasing ownership interest for 24+ months. Otherwise, the borrower must contribute cash in the amount of at least 10% of the purchase price.
• Personal Guarantees: Any who owns more than 20% must provide PG or if husband and wife (seen as one family unit, brothers and sisters considered separate family unit) each own 15% for a total of 30%, then they both to guarantee.
• Some Lenders Allow Projections: Show 1.15x DSCR or more in 1st year and thereafter (either new or acquisition of another location). Need 3 years of projections for new business or new location. Addbacks: expenses that will be eliminated as a result of the acquisition.
• Real Estate Purchases: 100% financing available.
• If buying in the same NAICS code, then may qualify for up to 100% financing. New Business: when an existing business starts or acquires a business that is in the same 6 digit NAICS code with identical ownership and in the same geographic area as the acquiring entity and they are co-borrowers, SBA considers this to be a business expansion and not a new business.

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