Acquiring a business can be a complex process, especially when it comes to securing Small Business Administration (SBA) financing. In this blog post, we will walk you through the key steps to streamline the SBA financing process for business acquisitions. By following these guidelines, you can ensure a smoother, faster, and more efficient path to obtaining the necessary funding.

Gather Comprehensive Financial Documents

One of the most crucial steps in securing SBA financing is to gather all necessary financial documents from the seller. This includes:

• Three years of the seller’s business tax returns: Obtain tax returns for 2020, 2021, and 2022.
• 2023 year-end Profit and Loss (P&L) statement: Ensure it includes a balance sheet.
• Balance sheets for 2022: This helps provide a complete financial picture of the business.

Starting with these documents is essential. They allow lenders to evaluate the financial health of the business you intend to acquire.

Complete Personal Financial Documentation

In addition to the seller’s financials, you need to provide your own financial information, especially if you own 20% or more of the business. This includes:

• Form 413 (Personal Financial Statement): Required for all significant stakeholders.
• Three years of personal and business tax returns: This helps demonstrate your financial stability and borrowing characteristics.
• Balance sheets for any existing businesses: If you own other businesses, include their financial details.
• A short resume: Detail your professional experience, especially if it relates to the business you are acquiring.

These documents help lenders assess your ability to manage the new business and repay the loan.

Consider Business Proximity

While it’s possible to purchase a business in another state, many banks prefer that the business is within a 2.5-hour radius of your location. This isn’t a universal requirement, but around 80% of banks have similar guidelines. If proximity is a concern, work with banks that are more flexible, especially if there are compensating factors that make your application strong.

Work with Cooperative Sellers

To streamline the process, ensure you are working with sellers willing to provide their tax returns. This is crucial because discrepancies often arise between P&L statements and tax returns. Sellers who refuse to share their tax returns can significantly slow down the process.

Meet Debt Service Coverage Ratio Requirements

Lenders use the Debt Service Coverage Ratio (DSCR) to assess the business’s ability to generate enough cash flow to cover its debt obligations. The SBA guideline for DSCR is 1.15, but banks typically prefer a ratio of 1.3 or higher. Ensuring the business meets or exceeds this ratio can improve your chances of securing financing.

Quick Tips for a Streamlined Process

1. Start with financials: Get the seller’s tax returns and your financial documents ready before approaching lenders.
2. Check business location guidelines: Be aware of the preferred proximity rules of your potential lenders.
3. Choose cooperative sellers: Work with those willing to provide all necessary documents.
4. Understand DSCR requirements: Aim for a DSCR of 1.3 or higher to strengthen your application.
5. Get a term sheet quickly: With all documents in place, you can usually get a term sheet within 48 hours.

Final Thoughts

Securing SBA financing for a business acquisition doesn’t have to be a daunting process. By preparing the necessary financial documents, understanding lender preferences, and working with cooperative sellers, you can significantly streamline the process. For more detailed advice and personalized assistance, consider booking a discovery call with an expert.