How to Improve the Salability of a “smaller” landscaping business
Last week a business owner asked me what he could do to improve the salability of his small landscaping business. He thought that based on its adjusted net income, it might be worth $1.5 to $2 million in sales price. He wondered if seller financing was his only option for selling the business.
The short answer for that business owner was NO! He had a healthy business with good cash flow that had been operating for more than 10 years. His financial ratios were in line with what a typical lender wants to see, and I told him he might want to pre-qualify his business with an SBA loan to make it even more attractive to potential buyers. In effect: you can add to your “salability” by prequalifying your business with an SBA loan.
Who might do this?
A small business that would expect to sell for under $5 million. The maximum amount of the loan (which may be reduced by other loans, buyer credit, etc.) is $5.5 million (check recent guidance for details). The business must have a cash flow that is positive and that is sufficient to support the buyer’s need to earn an income from the business and make the loan payments. Pre-qualifying the business will let you know if your price and structure for selling the business is in the ballpark of what a lender will consider acceptable for a buyer to take on.
Why would you do that?
Makes it quicker and easier to sell the business to a qualified purchaser. Some buyers only look at businesses that are pre-qualified since they know what kind of cash flow the business is generating that will support the loan without creating a hardship for the qualified buyer.
SBA loans may offer lower interest rates to the buyer than other lenders. In some cases, the buyer may use 401(k) retirement savings for a down payment.
What do I have to do to pre-qualify the business?
The first step is to pull together the past three years of the business’ tax returns and financial statements. The lender will evaluate the ratios and let you know any other information needed to pre-qualify the loan.
Who do I contact about this type of arrangement?
The best idea is to contact a specialist who sources these types of loans. Don’t assume your local banker is an SBA lender or that you have only the option of dealing with your local lenders. There are professionals who specialize in working with the SBA who can give you valuable feedback about your possibilities.
What should I do next?
I highly recommend you begin with a review of the helpful information provided on the SEC’s website itself. Here is a link:
https://www.sba.gov/business-guide/plan-your-business/buy-existing-business-or-franchise
If you search for highly rated SBA loan sourcing companies, please check references to be sure you are dealing with reputable folks. Ask them about the fees they would charge you, if any, and what the process for the buyer will be. There are some great ones out there. If you are working with a local broker to sell your business, they will probably have sources as well.
Would you like to discuss your next steps in selling or otherwise transitioning your business? Is your company achieving profitable growth? If you’d like to discuss your company’s organization from a buyer’s perspective, or the health and salability of your company’s anticipation of selling or otherwise transitioning your business, feel free to give us a call or email. We are also happy to discuss other ways to prepare your company for sale for now or for the future. You can reach me via email: [email protected] or on my cell phone: 224-688-8838.
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