What Small Business Owners Need to Know About Buyer Financing

May 30, 2019Insights

When you’re selling your business, it’s easy, understandable, and, in many ways, advantageous to become laser-focused on you. But a transaction requires the buyer and seller to reach an agreement together, which means you need to be conscious of who your buyer is and how they’re going to finance their purchase of your business. For owners, a little bit of knowledge on buyer financing goes a long way.


Cash Buyers Are Rare

Just like buying a car or home, buying a business typically requires financing. There are very few cash buyers out there. Some buyers may have personal equity, but not necessarily cash…and even those who do have the ability to make an all-cash purchase will usually seek conventional bank financing to save their cash.

The larger the sales price for the business, the likelihood of finding an all-cash buyer is even lower. Buying a business requires not only cash for the sales price but also the working capital to carry the business operations so the bigger the company, the more cash is needed to purchase and operate.


How SBA Loans Work

The Small Business Administration (SBA) does a wonderful job of making it possible for individual buyers to purchase small businesses. SBA financing still requires a loan, but the SBA will guarantee up to 80 percent of the loan, giving banks more incentive to lend to individual buyers. The lender must then go through the SBA for approval.

As an owner and seller, it helps to know the SBA requirements, most notably that both the buyer and the business must qualify for the loan. The cash flow of your business supports the loan. The good news for you, the owner, is that a buyer who qualifies for an SBA loan is generally a solid buyer because they, too, must show the financial capacity to back up the loan with assets.

For example, if a business has great cash flow, that helps justify a larger SBA loan. However, if the business doesn’t do well after the transaction, the bank needs to be able to access the buyer’s personal assets to secure the loan. The bank and the SBA both have two layers of protection: your business’ cash and the buyer’s assets.


What a Qualified Buyer Needs from You

Because your business’ cash flow is crucial in order for a qualified buyer to secure an SBA loan, manipulating your books solely for tax mitigation can come back to haunt you if you wish to sell. Sure, you might pay less in taxes today, but it will limit the funding ability of the buyer in the future.  They will only qualify for a smaller loan, or, worse, a qualified buyer won’t be able to get a loan for the sale price your business may be worth. If you have any intention of ever selling your business, bite the bullet, pay the taxes, and show profit.

Additionally, the SBA has a counterintuitive requirement that a business owner fully exit their business within one year of selling. The reason for this is to ensure the new owner knows how to run the business (so they can pay off the loan). No one wants your business to go under after a transaction, so try to let go of the emotional attachment and trust that the business will continue onward while you enjoy your next chapter in life.


Is your small business salable? Contact Exit Consulting Group for an exit assessment to find out.