First Home Bank provides SBA 7(a) loans to a variety of businesses and for various purposes, with business acquisition financing being a significant focus. As a top 10 SBA lender in the country, our team’s expertise extends beyond financing business acquisitions, and includes bankers with experience as both business owners/principals and financial advisors. We have compiled a list, a list we call the “Bankers’ Dozen,” of the most common roadblocks that come up during an acquisition transaction. The key is recognizing items that need to be addressed early in the process and discussing with your client and banker so there are no last-minute closing delays.
#1 No Creative Addbacks
All addbacks must be documented through IRS tax returns and/or interim company financials. Allowable addbacks can include:
- Nonworking friends & family on payroll if reported on W-2
- Unusually high fees, legal or bad debt
- Excessive owner compensation
- Non-recurring expenses such as moving costs or product development expenses
#2 Seller Tax Return Verification
Get a signed IRS Form 4506T from the seller on day 1. If there are any discrepancies that need to be addressed, the seller can begin to clear those up early in the process.
#3 Comprehensive Business List of Insurance Requirements to Close
- The SBA’s insurance requirements are not negotiable. Obtain a list from the seller of all business insurances currently in place. If insurances need to be added or amended to comply with the SBA, there will be plenty of time to be in compliance if an assessment is done up front.
- First Home Bank prefers to work directly with the insurance agent to obtain required insurance certificates with the appropriate SBA language. This allows the buyer to focus on other deal related items.
#4 Collateral Shortfall that Requires Life Insurance
- There’s no getting around this. If there is a collateral shortfall, life insurance in the amount of the collateral shortfall will be required for all guarantors.
- If the buyers/guarantors do not already have a life insurance agent, they can work with a “quick close” insurance provider as soon as the loan is approved.
- Sometimes the buyers/guarantors already have a life insurance policy in place. If so, make sure to collect copies of existing life policies and confirm that they are assignable.
- Provide the bank with contact information of the insurance provider so the bank can obtain the policy with the appropriate assignment.
#5 The Need for More Equity in the Deal
- As you are probably aware, the equity requirements for business acquisitions are changing with the release of the SBA’s new version of its Standard Operating Procedures (SOP 50 10 5(J)).
- While the SBA will be providing some additional insight into these changes, the basic change is that the buyer must contribute a minimum of 10% equity towards the entire transaction and there must be at least 10 percent equity on the post-transaction pro forma balance sheet.
- A seller note can still be used and can provide for up to half of the required equity injection. However, the seller note must be on full standby (no payments at all) for the life of the SBA loan.
- If the source of the buyer’s equity is coming from a gift, a Gift Letter with 2 months of bank statements showing the source of this gift will be required.
#6 Seller Keeping AR & Cash at Close
- In this situation, the buyer must prove that they will have sufficient working capital at closing.
- If necessary, the loan could include a 90-day working capital supply.
- The Bank will need to document post-closing liquidity.
- The Bank will need to document post-closing liquidity.
#7 Know Buyer’s Personal Credit Score
If under 700, get a written explanation and make sure there was no prior loss to U.S. government.
#8 Personal History Concerns
- A Resume and Statement of Personal History are required for each guarantor.
- The questions of “Have you EVER?” have no limitations on how long ago.
- If “yes”, have the guarantor complete the SBA form 912 and provide supporting documentation.
- Knowing issues early allows the Bank to clear through them during underwriting, which can avoid delays.
#9 Citizenship of the Buyer
- Determine the citizenship status of a buyer early on and get a copy of documentation early.
- They can obtain SBA financing if they have a green card and are legal permanent residents of the U.S.
#10 Leased Space & Landlord Subordination
- The term of the Lease must be equal to the term of loan, and renewal options can count towards the term.
- Prepare the seller to discuss the subordination requirement with the landlord and assist with getting subordination executed by landlord and buyer.
#11 Complete Equipment List
- Use the depreciation schedule in the seller’s business tax returns as starting point.
- The serial numbers for all equipment over $5,000 must be included.
#12 Relevant Management Experience
If the buyer does not have direct industry experience, obtain a detailed resume that expands on transferable management skills.
#13 Pledge of Personal Assets as Collateral
• If the business assets do not fully secure the loan, the SBA requires that any personal real property with lendable equity must be pledged as collateral.
• If there is no lendable equity, the pledge of the guarantor’s personal residence may not be required.
First Home Bank is a Top 10 Nationwide Preferred SBA Lender specializing in small business loans across a wide array of industries for business acquisitions, commercial real estate, equipment financing and working capital.