We met with the buyers this Sunday and they are interested in pursuing our business. That’s the good news.
The bad news is that they failed to get pre-qualified for an SBA loan. The buyer is seeking 80% financing using an SBA loan. I will carry a 10% note on a full two-year standby, and the buyer will put 10% of her own cash into the purchase. I sent the bank a copy of the company’s last three year’s tax returns and interim financial statements.
The buyer heard back from the bank today and the bank said that they need to see three years of steady cash flow similar to what we experienced last year in order to prequalify. According to the buyer, the bank said that a reduced loan amount, i.e., the buyer putting up more money or us providing more seller financing, would not make a difference. They want to see a few more years of cash flow that is more consistent.
What do you suggest we do? Should we talk to another bank, or will we get the same results? Should we reduce the asking price for the business? I don’t want the buyer to think that we are asking too much for the business just because the bank isn’t on board.
I recommend checking with another lender. Other banks may look at this situation differently. You should also talk to a loan broker, advisor or consultant. Loan consultants are in the best position to know whether this is a common issue with all banks or it can be overcome by talking to another bank. Loan consultants do not work exclusively for one lender, rather they function as a broker for SBA loans and work with many different banks. They are in touch with the market and know how to properly package a loan to get it approved.
In our experience, we have seen lots of deals get turned down by one bank only to get accepted by another bank. Aside from the objective requirements, SBA loans have subjective requirements that vary from bank to bank.
There may be some niche lenders out there that may be more aggressive than the first bank and loan brokers are likely to know who these banks are.
“We’ve seen lots of deals get turned down by one bank only to get accepted by another bank.”
As the seller, you need to know if an SBA loan is possible to avoid wasting your time on future deals if an SBA loan is not possible. In such case, we can adjust our marketing strategy to exclude the possibility of bank financing.
Also, if you have not filed your recent federal income tax returns yet, then it would make sense to run your draft tax returns by a loan broker before filing them with the IRS. A loan broker/consultant can review your tax returns and recommend ways to increase the likelihood of obtaining an SBA financing.
Some situations are quite tricky. For example, deducting the cost of your trip to Hawaii last year that cost you $5,000 may reduce the tax burden of your company. However, in the lender’s eyes, this reduces your company’s profitability, which reduces the amount of cash flow available to pay the loan.
Although business brokers make a lot of adjustments when normalizing financial statements, banks are conservative in the adjustments they make. Running your tax returns by us or a loan broker may result in changes that may improve the chances of bank financing.
A banks’ denial of a loan often has little to do with the fairness of your asking price. Lenders are by nature conservative, especially when granting an SBA loan, so don’t let this dampen your enthusiasm. Loans are often denied based on subjective requirements that do not have a bearing on the value of a business.
“An SBA loan denial often has little to do with the fairness of your asking price.”
We did a deal recently for around $700k and the bank performed an appraisal that came in at about $100k less than what we had accepted for the business. We had our appraiser tear apart the bank’s appraisal and we were able to get the loan restructured. Ironically, the appraisal was performed by a ‘third-party’ — the same third-party that several large broker networks recommend.
Never take the first no, there are always other lenders that are more aggressive. Keep persisting and keep the revenue stable and we will get a deal done eventually.
– Jacob Orosz, Morgan & Westfield