Acquisition: What A Lender Likes To See When Financing A Deal

by ExitAdvisor · 8th February 2018

The SBA in the USA finances many business acquisitions deals and, as business loan experts, have put together some tips on what lenders like to see when financing a buyout. They include:

Trend – they like to see an upward and sustainable trend in metrics like the profit, margin and cash flow. Negative trends are a big warning sign and they recommend that the vendor rectify this “defect” before putting their business on the market.

Business Plan -it’s reassuring to the lender when the buyer has a clear business plan and a transition plan in addition to a keen understanding of the business. A good grasp of the risks and ability to mitigate against those risks is also important. Plans to make too many changes too quickly could cause concern.

Key Employees – securing commitments from key persons to continue with the business and finding ways to incentivize them are also of importance and claim it’s critical to understand which employees are key to customer acquisition and retention.

Seller Transition Period – the longer the better. “The Small Business Administration (SBA) rules require sellers to get out of any key role after 12 months and not roll over any of their equity.”

Seller Financing – an element of seller financing, even if it’s a small portion, is reassuring to lenders as it demonstrates seller confidence in the future of the business and protects against material misrepresentations.

Working Capital – lenders will “analyze the operational and transitional working capital needs of the company. Reviewing monthly P&Ls and balance sheets over a two to three-year period, including Year-to-Date is extremely important. The deal negotiations should consider how much net-working capital may be included in the purchase and/or how much working capital needs to be provided in the loan structure.”