The Acquisition Lender – The Party With Most Impact On A Business Sale

There are many situations in which a business buyer and business owner reach an agreement to transfer a business, but ultimately fail to have the proper acquisition funding in place to actually close the deal.

“We frequently experience scenarios where a business buyer is motivated to move full steam ahead with an acquisition once he has clinched a deal with a business seller, only to recognize that several major hurdles are still ahead,” says Achim Neumann, President of A Neumann & Associates, a New Jersey based mergers & acquisitions and business brokerage firm.  “One of these hurdles is successfully completing due diligence, but a much bigger hurdle can actually be raising acquisition funds from a lender.”

Most transactions under $5 million involve some type of SBA financing.  While somewhat costly in fees, this is often the preferred method for buyer acquisition lending, as access to conventional commercial financing is often not available.  Contrary to common belief, the bank really is the ultimate lender, but with a guarantee by the SBA for the majority of the loan amount.  By definition, this imposes certain SBA requirements on the loan, such as a certain amount of equity in the business.

For example, if the goodwill in an acquisition exceeds $500k, then the SBA requires 25% equity in the deal.  If the buyer’s cash down payment alone does not meet the 25% hurdle rate, a seller note can be added.  However, if a seller note is required, it usually cannot be paid back for two years!  This provision might be a significant negative factor for the seller, especially if he or she had counted on the incoming cash flow as a substitute for continuous business income.  This new wrinkle can ultimately kill a deal, long after buyer and seller believed they had completed negotiations.

“Another factor often overlooked is the proper valuation of the business,“ says Frank Arcoleo, Managing Director.  “It goes without saying that an acquisition lender will not provide funding if a business valuation by a national, SBA qualified, accredited valuation firm is not in place.”

Ideally, the business valuation should be put in place long before the business goes onto the market.  However, we have found that many business owners will attempt to save such “upfront” expense because it’s not guaranteed that the business will indeed be sold.  Once a deal is in place between buyer and seller, and the buyer is seeking bank lending for the business acquisition, it can cause a major delay to put a valuation into place at that late date.

In sum, business buyers and sellers need to recognize that in most cases the acquisition lender has a significant impact, not only on the deal structure but also on the final outcome — namely, whether the deal is closed at all.  Therefore, both parties should seek professional advice from qualified M&A advisors and business brokers to facilitate a proper deal structure between both parties in the early stages, long before a deal is presented to a bank.