CASE STUDY: A SBA loan client of mine is buying a cabinet sales and distributorship from a seller asking a price of $2.1M. The buyer has been Pre-Qualified with us for a business with a purchase price of $3M or less, and with adjusted net income of at least $300K after debt service. He was approved to buy almost any type of service or manufacturing type of business with his qualifications and background.
Here are the facts on this CASE STUDY for business purchase SBA financing:
Seller Information & Deal Structure
* Purchase Price: $2.1M
* Adjusted Net Income: 2006 (6 Mo's): $800K+, 2005: $400K, 2004: $166K, 2003: $223K
* History of Earnings/Adjusted Net Income: Increasing Except 1994 there was a dip
* Interim 2006 Earnings: Substancially Up over last year
* Deal Structure: 10% down payment, $1.1M Owner Carry, Balance - SBA loan financing
* Owner Carry: $1.1M
* Working Capital Needed: Yes - Will come from home equity
* Total Loan Amount: $900K
* Lease: 10 Year Term (5+5)
* Business Real Estate Available: No
* Established: 5+ Years
Buyer Information
* Down Payment Available: 10%
* Down Payment Origination: Savings & Home Equity
* Geography: Moving to buy business
* Work Experience: Somewhat related - oversees construction, self-employed now
* Approximately Credit Score: 800+
* Cash In Reserves (Liquidity): $300K (24 Months Living Expenses)
* Annual Living Expenses: $150K
* Spouse: Yes
* Outside Income: Wife works from home - can do the same in new area
* Currently Works: Owns his own business - will occasionally consult
* Equity In Home Before Purchase: $700K
* Equity Left In Home After Purchase (Lien on Loan): $300K
Open Issues On This Deal
* New lease has to be a total 10 year term (5+5)
* Buyer needs renegotiate seller carry of $1.1M
* Buyer needs to take equity out of home for down payment and working capital
* Buyer needs to complete training agreement and non-compete
Conclusion
The seller like most sellers wanted the valuation on the company based on future earnings (which are fabulous for this business) however lenders primarily look at the past 2/3 years of performance - based off tax returns and financials. This particular company shows a (lender) adjusted net income of $250K to $400K over the past 3 years and does not support the seller's price of $2.1M.
We have structured the deal where the owner is going to take back a note of $1.1M (with conditions). Even though the seller had more write-offs as a business owner, lenders are fairly conservative and tend not to add back hard to prove add-backs. Even though the buyers work experience and skills are not an exact match with the business they are close and we are securing him a $900K SBA 7(a) PLP loan to purchase this business.Technorati Tags:
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