A recent article in Axial provided feedback from a loan expert’s perspective on what is important in preparing a business for sale.
Middle market business buyers are faced with many considerations when preparing to buy a business. The Small Business Administration (SBA) guarantees bank loans to small businesses that meet the SBA’s criteria. These criteria vary by industry but are notably more lenient than a bank’s typical loan standards. Terms are generous, up to 10 years for a business loan with no prepayment penalty.
Stable or Positive Trend
Lenders like to see positive or stable trends when examining a business’s financials. Positive trends, while generally a good sign, also require additional diligence to support that any recent growth, or margin improvement is sustainable. It can also be challenging to value very recent improvement in EBITDA. Underwriting is based, to a large extent, on historic cash flow analysis and historic debt service coverage. So, stability in trends are generally the easiest for a lender to have confidence in. Additionally, revenue concentrations must be analyzed to ensure sustainability risks are fully considered and that the deal structure helps mitigate any large customer concentrations. Revenues concentrations in certain industries, such as ties to cyclical industries like new construction, should also be fully analyzed. A decrease in revenue is a red flag. If the business you are looking to purchase has negative trends, be sure you can identify the problems and include ways to increase value in your business plan. Most lenders will want to stabilize, if not reverse, a negative trend before lending.