How to Buy a Business With an SBA Loan

Decide if buying makes sense and find a target

Buying an existing business gives you customers, staff and cash flow on day one. The tradeoff is price and risk, so look for steady earnings you understand.

Start with what you can run. A business in a field you know is easier to value and to finance. Listing services, online marketplaces, industry contacts and retiring owners are all sources. Our list of places to look for a business to buy covers where listings appear, and finding a small business for sale goes further.

Screen quickly. Ask for three years of tax returns and current financial statements. Walk away from businesses with falling revenue you cannot explain, heavy dependence on one customer, or an owner who is the only relationship holder.

Understand the value before you make an offer

Lenders will not finance far above a supportable value. Use earnings-based methods, adjust for owner pay, and expect an appraisal or valuation review.

Most small businesses are priced as a multiple of seller's discretionary earnings or adjusted cash flow. The multiple varies by industry and size. Verify the seller's add-backs, because inflated add-backs are a common way to inflate price.

Read business valuation methods and determining market value before negotiating. Consider hiring an accountant to review the books. If the business cannot cover loan payments, your salary and a cushion from its own cash flow, the deal is too expensive.

Know how SBA lenders review an acquisition

Lenders look at the business's historical cash flow, your experience, your credit, and how much of your own cash you put in. Expect a down payment and a personal guarantee.

Lenders usually want to see that the business generates enough cash to repay the debt with room to spare. They calculate a debt service coverage ratio. Learn how it works in understanding debt service coverage ratio.

Plan for these requirements:

• An owner equity injection, often a meaningful percentage of the price. Ask the lender for the current requirement.
• A personal guarantee from owners with significant ownership.
• Relevant management or industry experience.
• A sound business plan for the first years of ownership.

Rules and program terms change, so confirm current details with the SBA and your lender. See SBA loan requirements for the general picture.

Assemble the documents

Expect to provide personal financial statements, tax returns, the business's financials, a purchase agreement or letter of intent, and a plan. Organized files shorten the timeline.

A typical package includes:

1. Your personal financial statement and recent tax returns
2. Three years of the target's tax returns and year-to-date financials
3. A signed letter of intent or purchase agreement
4. Your resume showing relevant experience
5. A projection for the first two to three years
6. Details on any real estate, equipment and inventory included in the sale

Use the small business loan application checklist to stay organized. Ask an attorney to review the purchase agreement, including how assets, liabilities, leases and licenses transfer.

Plan for timing and closing

SBA acquisition loans typically take weeks to months from application to closing. Build that timeline into your purchase agreement.

Underwriting, valuation, due diligence and legal work all take time. Delays commonly come from missing documents and late seller cooperation. Negotiate a closing window that allows for it, and keep the seller engaged. Read how long an SBA loan takes and what to expect at closing.

Also reserve working capital. New owners often need cash for payroll, inventory and surprises in the first 90 days. Do not spend every dollar on the purchase.

Where ROI Funder fits, and where it does not

ROI Funder does not place acquisition loans. It can help with SBA loans and with working capital for an established business once you own it.

To be clear, ROI Funder does not offer acquisition loans for the purchase itself. The closest fit is an SBA loan, which is slower but lower cost, and which may be used for a business purchase depending on the lender and program. After you own the business, working capital or a line of credit can cover payroll, inventory or growth.

Eligibility for ROI Funder products includes 6+ months in business, $20,000+ monthly revenue and 500+ FICO. Same-day funding is possible on approved, complete files. A soft credit pull applies, with no obligation.