Quick takeaways
- Buyers usually pay with cash, an SBA backed loan, a seller note, or a mix.
- A seller note is often ten to twenty five percent of the price and is secured by a lien.
- SBA lenders typically limit debt to about three times adjusted cash flow.
- Seller financing can close faster than an SBA loan.
Three ways buyers pay
Under about five million dollars, most deals use cash, a loan backed by the Small Business Administration, seller financing, or a combination. Large companies bring bank financing and other structures.
Cash
Cash is rare for smaller companies. A buyer with the money is a strong prospect, but proof of funds is still required before you spend your time.
SBA loans
SBA backed loans fund many small deals. Lenders often limit debt to roughly three times adjusted cash flow, so SBA buyers typically afford around four times earnings or less, with the rest coming from their own equity.
These deals involve a contract between buyer and seller and a loan between buyer and bank, which must close together. They often take longer, around nine to twelve months in some surveys.
Seller financing
With a seller note, you finance part of the price and the buyer pays you over time. Notes are often ten to twenty five percent of the price and are secured by a lien on business assets.
Seller financing widens the buyer pool and can close faster, around six months in some estimates. You take on risk if the business struggles, so ask your attorney how the note is secured.
Working capital
Lenders may want working capital left in the business. If the buyer must fund it, the effective price rises, so decide early who covers it.
What lenders look at
Lenders review the buyer first, then your records. Tax returns, bank statements and a clean asset list help. Unreconciled books slow a closing or sink it.
Tax angle
Installment payments can spread gain across the years you receive them. Ask your CPA how that works, and read how the price gets split. Then see what your company is worth.