Sell Your Business Faster – Prequalify it for Bank Financing
Business Owners Should Prequalify Their Business For Potential Buyers Before Putting It On the Market.
Whenever we advise our business-owner clients this, they look at us sideways wondering if we have lost our minds! They usually reply, “isn’t it the buyers responsibility to get prequalified and get financing for the purchase of my business?” Nothing could be further from the truth.
It makes good sense for business owners to have their business financial records, tax returns, deal structure, and price reviewed by lending institutions before marketing the business to prospective buyers for several reasons.
1. Based on the financials and tax returns from the previous three years you need to know if your business is eligible for potential buyers to get a loan to buy your business. If you know that your business is not eligible for financing, then you know that the deal structure for selling your business will be very different without bank financing involved.
2. You also won’t waste time with buyers who say they can get financing when you already know this cannot be achieved. Most buyers usually scramble at the last minute to get financing and will be further hindered by lenders who won’t approve a loan for your business – wasting your time and theirs.
3. You need to know how you should structure your deal correctly. This will bring the right type of buyers to the table who can complete the transaction with minimal complications.
4. If the business is prequalified for bank financing, not only will you get more interest from the right prospective buyers because of your good financial records, but you will have saved the buyer time and effort in securing financing for the acquisition. Time is a deal killer. So any homework done upfront will pay off at this critical stage of the sale process.
5. Furthermore, a business eligible for financing will usually get a higher price and in many instance get all cash instead of having to take back a note and finance it yourself!
6. Lenders who are willing to finance a business will also give advice on what types of buyers would be approved for financing for your type and potential deal structure. Some lenders will issue a letter of prequalification that can be presented to qualified potential buyers!
7. If you know that you have financing lined up for potential buyers, you can better control the deal knowing that you don’t have to rely on the buyers to go out and search for financing – keeping you waiting as they hunt for a loan and other would-be potential business buyers move on to other deals.
8. In the interest of saving time, a good idea is to encourage buyers to utilize the financing institution that has already reviewed the financials and prequalified the business. However, keep in mind that just because your business has passed the test for financing doesn’t mean the potential buyer automatically gets a loan. The buyer, too, must be financeable and have the background required to obtain the loan for the business.
What is usually required to get your business prequalified for financing? Usually 30 minutes of phone time answering questions about the business. The recent 3 years of the company’s tax returns. The recent 3 years of business financials — profit and loss statement, balance sheet, and interim financials for the current calendar or fiscal year.
We have relationships with many SBA Banks and other lending establishments that vary in their criteria and preferences in the types of businesses they finance. It is our standard procedure to perform this prequalification exercise with our clients early in the selling process to achieve our client’s goal — the best possible price in the shortest time-frame possible.