Certain Elements Must be Present in a Transaction in Order to Bring the Requisite Level of Comfort to a Lender
A history of proven profitability is paramount. Startups and rosy forecasts simply will not get a hearing. Two to three years of proven profitable operation is required in most cases.
Just as the business must have a good track record, so must the buyer. Poor credit will make it virtually impossible to finance a business acquistion.
There must be sufficient assets in the picture somewhere to provide what lenders call “secondary support.” This is a nice way of describing the collateral that will be sold if it becomes necessary in case of default.
If these three elements are in place, and the business produces enough cash flow to service the requested loan with some room to spare, and the prospective buyer has sufficient industry-specific experience, then there is a reasonable chance that a commercial bank will finance up to approximately 70% of the purchase price.
Debt service coverage ratios vary, depending on other aspects of the transaction, but a requirement of 1.25 to 1.30 is not uncommon. This means that the operation must produce a net operating cash flow of approximately 125% of the loan payment. And this capability must be demonstrated historically, not in a forecast.
We are not bankers, but we have a working business knowledge of the essential qualifying requirements that must be met for any loan to occur. We can help with the broad outlines of a financing structure that would be worth considering.
We have years of experience in these areas, and can explore financing alternatives that make sense. In addition, we have worked with local lenders who are familiar with the type of loan involved, and we can refer you to them.
If you would like to have a no-charge phone session to explore how we sell businesses and help buyers finance them, our broker in charge of business sales, Gary Richards, will be happy to talk with you.
He has directed the capital formation of more than a hundred businesses totalling more than $120 million, and will be able to discuss your situation based on his experience.