How to Prepare to Buy a Business – a Banker’s Perspective
Whether you are a broker or a buyer working on your first business acquisition or your 15th deal, it never hurts to take a step back and learn from the other parties in the transaction. From my seat as a banker – with specific focus on Small Business Administration (SBA) lending, here are a few things I think you should know as you prepare to buy a business and seek financing. If you are a first-time buyer, this might serve as an educational checklist, while I hope more experienced buyers and brokers find useful refreshers from a banker’s perspective.
When a bank makes a loan to someone to purchase a business, they want to have confidence that the buyer can operate the business successfully in order to repay the loan. Hopefully, this is obvious! A bank looks for several things to assess the probability of repayment. Following are three key components of a business acquisition that a bank will focus on:
- Buyer Experience
The buyer should have relevant or translatable industry or business leadership experience. This can include experience managing individuals and teams to deliver business results. It may also mean demonstrating experience with similar businesses processes and budgets. If a business requires technical expertise, the bank will want to know that the buyer can manage the complexity of the technology, as needed.
If a buyer has gaps in their experience in key functional areas, they need to be able to articulate a plan for addressing those. This can be addressed through a retention and engagement plan for key staff at the company or an outsourcing plan. Fractional support is a popular way to bring in expertise, relatively affordably. If you don’t know where to find the right fractional support to fill the gap, your banker or broker will most likely have good resources to point you to.
Buyers should take time to prepare for this part of the lending conversation by ensuring that they have up-to-date resumes that highlight the relevant experiences and competencies. Work with your broker or other outside advisors in advance of meeting with a banker to identify any skills that need to be supplemented and having a plan in place for how to address can also accelerate this part of the lender evaluation.
- Buyer’s Financial Resources
Of course, the financial wherewithal of the buyer is another key consideration in any lending decision. Not only will the bank look for the buyer’s ability to make an initial equity injection, but they will also assess the buyer’s access to additional capital if the business is slow to meet projections, faces industry headwinds, or suffers during an economic downturn. If the buyer cannot meet these financial requirements on their own, the bank will want to know if there is someone who can provide a loan guarantee or be a partial owner and bear some of the financial risk.
It is common that the seller can help reduce the amount of an initial capital requirement via seller financing. The less the buyer will need to inject, the more they can preserve for the potential future capital needs. With the current interest rate environment, I am seeing seller financing included in more transactions now.
- Company Performance
Does the company being purchased show sufficient historical cash flow to service the acquisition -related debt? The bank will evaluate the business to understand its revenue, expense, and cash flow trends. The bank will assess how vulnerable the business is to external pressures including economic slowdowns. Other risks that may give a bank hesitation when reviewing the business are outsized concentrations of suppliers or customers or unfavorable terms in key contracts that will be assumed as part of the transaction.
The business review will also look at the role the current owner is playing in the business to understand what capabilities might be missing after that person leaves and how they will be filled by current staff or the new owner. The bank will assess the likelihood of key staff and customers staying with the business after the ownership change. The broker and buyer can streamline some aspects of this review by providing high quality financial projections and a comprehensive business plan. The business plan should include a clear explanation of the role the buyer intends to play in the acquired business and how they will be compensated. Most businesses require significant, ongoing involvement from the owner and the buyer should plan accordingly.
If a buyer needs outside expertise to support putting together a business plan and financial projections, both bankers and brokers are likely to have a strong network of advisors that they can refer to. Spending time on getting the valuation and price right up front can save a lot of time when it comes to starting the lending conversation. Including proposed changes to the business operations can add a layer of complexity to the business plan, but they can also demonstrate the buyer’s expertise and understanding of what it will take to make the business successful.
Brokers play a vital role in facilitating transactions by connecting buyers and sellers. They also can help create efficiencies and set expectations in transactions by sharing with the parties what will be needed at various stages of the transaction. From the banker perspective, include us in conversations early. While we will want all the information outlined above during the process, we can also have more conceptual conversations with the broker and buyer early on to discuss financing possibilities and ranges. After all, it would be extremely frustrating on all sides to find out late in the process that the business doesn’t qualify for financing or that the buyer isn’t eligible for a large enough loan to pay the purchase price – and none of us want that. We would much rather see people succeed in their business ownership dreams. That’s something we can put our money behind.
This article was written by Ann Franklin. Ann, an experienced banking professional, brings a wealth of expertise to her role. With over 17 years of experience at a national bank, primarily in credit and sales positions within Asset Based Lending (ABL) and Small Business Administration (SBA), Ann has honed her skills in understanding the needs of small businesses.
Now with Fidelity Bank, Ann leverages her extensive industry knowledge to provide exceptional service. Valuing prompt communication, she ensures quick responses to client inquiries. Leveraging her experience and the agility of Fidelity Bank, Ann expedites approvals and deal closures. Transparent and supportive, she keeps customers and referral sources updated throughout the loan process. Contact Ann to discuss how she can assist you in achieving your financial goals.